18
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20202021
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-36709
SIENTRA, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) |
| 20-5551000 (I.R.S. Employer Identification No.) |
420 South Fairview Avenue, Suite 200 Santa Barbara, California (Address of Principal Executive Offices) |
| 93117 (Zip Code) |
(805) 562-3500
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Common Stock, par value $0.01 per share |
| SIEN |
| The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ |
| Accelerated filer |
| |
Non-accelerated filer |
|
| Smaller reporting company | ☒ | |
|
|
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 1, 2020,3, 2021, the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was 50,033,442.57,520,682.
SIENTRA, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 20202021
“Sientra”, “Sientra Platinum20”, “Sientra Full Circle”, “Sientra OPUS”, “OPUS”, “OPUS Curve”, “OPUS Luxe”, “ACX”, “Allox”, “Allox2”, “Anatomical Controlled”, “BIOCORNEUM”, “Curve”, “Dermaspan”, “Luxe”, “Softspan”, “Silishield”, “miraDry”, “Miramar Labs”, “miraDry and Design”, “miraDry Fresh”, “bioTip”, “The Sweat Stops Here”, “No Sweat No Stress”, “Sweat Less Live More”, “Drop Design”, “miraWave”, “miraSmooth”, “miraFresh”, “freshRewards”, “freshNet”, “freshEquity”, “freshConnect”, and “ML Stylized mark” are trademarks of our company. Our logo and our other trade names, trademarks and service marks appearing in this document are our property. Other trade names, trademarks and service marks appearing in this document are the property of their respective owners. Solely for convenience, our trademarks and trade names referred to in thethis document appear without the TM or the (R) symbol, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the rights of the applicable licensor to these trademarks and trade names.
PART I — FINANCIALFINANCIAL INFORMATION
SIENTRA, INC.
Condensed Consolidated Balance Sheets
(In thousands, except per share and share amounts)
(Unaudited)
|
| March 31, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 112,062 |
|
| $ | 87,608 |
|
| $ | 80,372 |
|
| $ | 54,967 |
|
Accounts receivable, net of allowances of $2,741 and $3,835 at March 31, 2020 and December 31, 2019, respectively |
|
| 25,425 |
|
|
| 27,548 |
| ||||||||
Accounts receivable, net of allowances of $3,658 and $4,464 at March 31, 2021 and December 31, 2020, respectively |
|
| 25,438 |
|
|
| 23,503 |
| ||||||||
Inventories, net |
|
| 42,118 |
|
|
| 39,612 |
|
|
| 50,556 |
|
|
| 48,648 |
|
Prepaid expenses and other current assets |
|
| 2,264 |
|
|
| 2,489 |
|
|
| 2,803 |
|
|
| 2,154 |
|
Total current assets |
|
| 181,869 |
|
|
| 157,257 |
|
|
| 159,169 |
|
|
| 129,272 |
|
Property and equipment, net |
|
| 12,344 |
|
|
| 12,314 |
|
|
| 13,388 |
|
|
| 13,106 |
|
Goodwill |
|
| 9,202 |
|
|
| 9,202 |
|
|
| 9,202 |
|
|
| 9,202 |
|
Other intangible assets, net |
|
| 10,383 |
|
|
| 17,390 |
|
|
| 9,081 |
|
|
| 9,387 |
|
Other assets |
|
| 9,048 |
|
|
| 8,241 |
|
|
| 7,573 |
|
|
| 8,011 |
|
Total assets |
| $ | 222,846 |
|
| $ | 204,404 |
|
| $ | 198,413 |
|
| $ | 168,978 |
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
| $ | 25,000 |
|
| $ | 6,508 |
|
| $ | 5,820 |
|
| $ | 4,670 |
|
Accounts payable |
|
| 5,835 |
|
|
| 9,352 |
|
|
| 3,845 |
|
|
| 6,504 |
|
Accrued and other current liabilities |
|
| 26,402 |
|
|
| 32,551 |
|
|
| 26,935 |
|
|
| 32,389 |
|
Customer deposits |
|
| 15,227 |
|
|
| 13,943 |
|
|
| 21,956 |
|
|
| 17,905 |
|
Sales return liability |
|
| 8,707 |
|
|
| 8,116 |
|
|
| 11,020 |
|
|
| 9,192 |
|
Total current liabilities |
|
| 81,171 |
|
|
| 70,470 |
|
|
| 69,576 |
|
|
| 70,660 |
|
Long-term debt |
|
| 55,918 |
|
|
| 38,248 |
|
|
| 60,540 |
|
|
| 60,500 |
|
Derivative liability |
|
| 16,230 |
|
|
| — |
|
|
| 69,310 |
|
|
| 26,570 |
|
Deferred and contingent consideration |
|
| 5,285 |
|
|
| 5,177 |
|
|
| 2,467 |
|
|
| 2,350 |
|
Warranty reserve and other long-term liabilities |
|
| 9,375 |
|
|
| 8,627 |
|
|
| 9,461 |
|
|
| 9,455 |
|
Total liabilities |
|
| 167,979 |
|
|
| 122,522 |
|
|
| 211,354 |
|
|
| 169,535 |
|
Commitments and contingencies (Note 15) |
|
|
|
|
|
|
|
| ||||||||
Stockholders’ equity: |
|
|
|
|
|
|
|
| ||||||||
Preferred stock, $0.01 par value – Authorized 10,000,000 shares; none issued or outstanding |
|
| — |
|
|
| — |
| ||||||||
Common stock, $0.01 par value — Authorized 200,000,000 shares; issued 50,079,024 and 49,612,907 and outstanding 50,006,297 and 49,540,180 shares at March 31, 2020 and December 31, 2019, respectively |
|
| 500 |
|
|
| 495 |
| ||||||||
Commitments and contingencies (Note 11) |
|
|
|
|
|
|
|
| ||||||||
Stockholders’ equity (deficit): |
|
|
|
|
|
|
|
| ||||||||
Preferred stock, $0.01 par value – Authorized 10,000,000 shares; NaN issued or outstanding |
|
| — |
|
|
| — |
| ||||||||
Common stock, $0.01 par value — Authorized 200,000,000 shares; issued 57,515,085 and 50,712,151 and outstanding 57,442,358 and 50,639,424 shares at March 31, 2021 and December 31, 2020, respectively |
|
| 574 |
|
|
| 506 |
| ||||||||
Additional paid-in capital |
|
| 552,154 |
|
|
| 550,562 |
|
|
| 600,297 |
|
|
| 558,059 |
|
Treasury stock, at cost (72,727 shares at March 31, 2020 and December 31, 2019) |
|
| (260 | ) |
|
| (260 | ) | ||||||||
Treasury stock, at cost (72,727 shares at March 31, 2021 and December 31, 2020) |
|
| (260 | ) |
|
| (260 | ) | ||||||||
Accumulated deficit |
|
| (497,527 | ) |
|
| (468,915 | ) |
|
| (613,552 | ) |
|
| (558,862 | ) |
Total stockholders’ equity |
|
| 54,867 |
|
|
| 81,882 |
| ||||||||
Total stockholders’ equity (deficit) |
|
| (12,941 | ) |
|
| (557 | ) | ||||||||
Total liabilities and stockholders’ equity |
| $ | 222,846 |
|
| $ | 204,404 |
|
| $ | 198,413 |
|
| $ | 168,978 |
|
See accompanying notes to condensed consolidated financial statements.
Condensed Consolidated Statements of Operations
(In thousands, except per share and share amounts)
(Unaudited)
|
| Three Months Ended |
|
| Three Months Ended |
| ||||||||||
|
| March 31, |
|
| March 31, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
| ||||
Net sales |
| $ | 16,932 |
|
| $ | 17,552 |
|
| $ | 23,236 |
|
| $ | 16,932 |
|
Cost of goods sold |
|
| 6,792 |
|
|
| 6,474 |
|
|
| 10,935 |
|
|
| 6,792 |
|
Gross profit |
|
| 10,140 |
|
|
| 11,078 |
|
|
| 12,301 |
|
|
| 10,140 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
| 16,763 |
|
|
| 20,401 |
|
|
| 12,375 |
|
|
| 16,763 |
|
Research and development |
|
| 2,908 |
|
|
| 3,054 |
|
|
| 2,392 |
|
|
| 2,908 |
|
General and administrative |
|
| 9,304 |
|
|
| 13,474 |
|
|
| 7,354 |
|
|
| 9,304 |
|
Restructuring |
|
| 1,739 |
|
|
| — |
|
|
| — |
|
|
| 1,739 |
|
Impairment |
|
| 6,432 |
|
|
| — |
|
|
| — |
|
|
| 6,432 |
|
Total operating expenses |
|
| 37,146 |
|
|
| 36,929 |
|
|
| 22,121 |
|
|
| 37,146 |
|
Loss from operations |
|
| (27,006 | ) |
|
| (25,851 | ) |
|
| (9,820 | ) |
|
| (27,006 | ) |
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
| 180 |
|
|
| 304 |
|
|
| 2 |
|
|
| 180 |
|
Interest expense |
|
| (1,623 | ) |
|
| (952 | ) |
|
| (2,004 | ) |
|
| (1,623 | ) |
Change in fair value of derivative liability |
|
| (42,740 | ) |
|
| (130 | ) | ||||||||
Other income (expense), net |
|
| (163 | ) |
|
| 15 |
|
|
| (128 | ) |
|
| (33 | ) |
Total other income (expense), net |
|
| (1,606 | ) |
|
| (633 | ) |
|
| (44,870 | ) |
|
| (1,606 | ) |
Loss before income taxes |
|
| (28,612 | ) |
|
| (26,484 | ) |
|
| (54,690 | ) |
|
| (28,612 | ) |
Income tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net loss |
| $ | (28,612 | ) |
| $ | (26,484 | ) |
| $ | (54,690 | ) |
| $ | (28,612 | ) |
Basic and diluted net loss per share attributable to common stockholders |
| $ | (0.57 | ) |
| $ | (0.91 | ) |
| $ | (1.01 | ) |
| $ | (0.57 | ) |
Weighted average outstanding common shares used for net loss per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
| 49,916,412 |
|
|
| 29,099,382 |
|
|
| 54,321,146 |
|
|
| 49,916,412 |
|
See accompanying notes to condensed consolidated financial statements.
SIENTRA, INC.
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
(In thousands, except share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
| Total |
| |||||||||||||||||||||||||||||||||||||||||||
|
| Preferred stock |
|
| Common stock |
|
| Treasury stock |
|
| paid-in |
|
| Accumulated |
|
| stockholders' |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| capital |
|
| deficit |
|
| equity |
| |||||||||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2018 |
|
| — |
|
| $ | — |
|
|
| 28,701,494 |
|
| $ | 286 |
|
|
| 72,727 |
|
| $ | (260 | ) |
| $ | 428,949 |
|
| $ | (362,097 | ) |
| $ | 66,878 |
| ||||||||||||||||||||||||||||||||||||
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,772 |
|
|
| — |
|
|
| 3,772 |
| ||||||||||||||||||||||||||||||||||||
Stock option exercises |
|
|
|
|
|
|
|
|
|
| 45,453 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 106 |
|
|
| — |
|
|
| 106 |
| ||||||||||||||||||||||||||||||||||||
Employee stock purchase program (ESPP) |
|
| — |
|
|
| — |
|
|
| 68,899 |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 682 |
|
|
| — |
|
|
| 683 |
| ||||||||||||||||||||||||||||||||||||
Vested restricted stock |
|
| — |
|
|
| — |
|
|
| 671,245 |
|
|
| 7 |
|
|
| — |
|
|
| — |
|
|
| (7 | ) |
|
| — |
|
|
| — |
| ||||||||||||||||||||||||||||||||||||
Shares withheld for tax obligations on vested RSUs |
|
| — |
|
|
| — |
|
|
| (212,714 | ) |
|
| (2 | ) |
|
| — |
|
|
| — |
|
|
| (2,723 | ) |
|
| — |
|
|
| (2,725 | ) | ||||||||||||||||||||||||||||||||||||
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| $ | (26,484 | ) |
|
| (26,484 | ) | ||||||||||||||||||||||||||||||||||||
Balances at March 31, 2019 |
|
| — |
|
|
| — |
|
|
| 29,274,377 |
|
| $ | 292 |
|
|
| 72,727 |
|
| $ | (260 | ) |
| $ | 430,779 |
|
| $ | (388,581 | ) |
| $ | 42,230 |
| ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
| Total |
| ||||||||||||||
|
| Preferred stock |
|
| Common stock |
|
| Treasury stock |
|
| paid-in |
|
| Accumulated |
|
| stockholders' |
|
| Preferred stock |
|
| Common stock |
|
| Treasury stock |
|
| paid-in |
|
| Accumulated |
|
| stockholders' |
| ||||||||||||||||||||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| capital |
|
| deficit |
|
| equity |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| capital |
|
| deficit |
|
| equity |
| ||||||||||||||||||
Balances at December 31, 2019 |
|
| — |
|
| $ | — |
|
|
| 49,612,907 |
|
| $ | 495 |
|
|
| 72,727 |
|
| $ | (260 | ) |
| $ | 550,562 |
|
| $ | (468,915 | ) |
| $ | 81,882 |
|
|
| — |
|
| $ | — |
|
|
| 49,612,907 |
|
| $ | 495 |
|
|
| 72,727 |
|
| $ | (260 | ) |
| $ | 550,562 |
|
| $ | (468,915 | ) |
| $ | 81,882 |
|
Issuance of common stock through ATM |
|
| — |
|
|
| — |
|
|
| 37,000 |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 263 |
|
|
| — |
|
|
| 264 |
|
|
| — |
|
|
| — |
|
|
| 37,000 |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 263 |
|
|
| — |
|
|
| 264 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,000 |
|
|
| — |
|
|
| 2,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,000 |
|
|
| — |
|
|
| 2,000 |
|
Employee stock purchase program (ESPP) |
|
| — |
|
|
| — |
|
|
| 113,615 |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 533 |
|
|
| — |
|
|
| 534 |
|
|
| — |
|
|
| — |
|
|
| 113,615 |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 533 |
|
|
| — |
|
|
| 534 |
|
Vested restricted stock |
|
| — |
|
|
| — |
|
|
| 472,914 |
|
|
| 5 |
|
|
| — |
|
|
| — |
|
|
| (5 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 472,914 |
|
|
| 5 |
|
|
| — |
|
|
| — |
|
|
| (5 | ) |
|
| — |
|
|
| — |
|
Shares withheld for tax obligations on vested RSUs |
|
| — |
|
|
| — |
|
|
| (157,412 | ) |
|
| (2 | ) |
|
| — |
|
|
| — |
|
|
| (1,199 | ) |
|
| — |
|
|
| (1,201 | ) |
|
| — |
|
|
| — |
|
|
| (157,412 | ) |
|
| (2 | ) |
|
| — |
|
|
| — |
|
|
| (1,199 | ) |
|
| — |
|
|
| (1,201 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (28,612 | ) |
|
| (28,612 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (28,612 | ) |
|
| (28,612 | ) |
Balances at March 31, 2020 |
|
| — |
|
|
| — |
|
|
| 50,079,024 |
|
| $ | 500 |
|
|
| 72,727 |
|
| $ | (260 | ) |
|
| 552,154 |
|
| $ | (497,527 | ) |
| $ | 54,867 |
|
|
| — |
|
| $ | — |
|
|
| 50,079,024 |
|
| $ | 500 |
|
|
| 72,727 |
|
| $ | (260 | ) |
| $ | 552,154 |
|
| $ | (497,527 | ) |
| $ | 54,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
| Total |
| |||||||||||||||||||||||||||||||||||||||||||
|
| Preferred stock |
|
| Common stock |
|
| Treasury stock |
|
| paid-in |
|
| Accumulated |
|
| stockholders' |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| capital |
|
| deficit |
|
| equity |
| |||||||||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2020 |
|
| — |
|
| $ | — |
|
|
| 50,712,151 |
|
| $ | 506 |
|
|
| 72,727 |
|
| $ | (260 | ) |
| $ | 558,059 |
|
| $ | (558,862 | ) |
| $ | (557 | ) | ||||||||||||||||||||||||||||||||||||
Proceeds from follow-on offering, net of costs |
|
| — |
|
|
| — |
|
|
| 6,222,222 |
|
|
| 62 |
|
|
| — |
|
|
| — |
|
|
| 39,164 |
|
|
| — |
|
|
| 39,226 |
| ||||||||||||||||||||||||||||||||||||
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,163 |
|
|
| — |
|
|
| 3,163 |
| ||||||||||||||||||||||||||||||||||||
Stock option exercises |
|
| — |
|
|
| — |
|
|
| 12,727 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 51 |
|
|
| — |
|
|
| 51 |
| ||||||||||||||||||||||||||||||||||||
Employee stock purchase program (ESPP) |
|
| — |
|
|
| — |
|
|
| 95,919 |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 322 |
|
|
| — |
|
|
| 323 |
| ||||||||||||||||||||||||||||||||||||
Vested restricted stock |
|
| — |
|
|
| — |
|
|
| 554,896 |
|
|
| 6 |
|
|
| — |
|
|
| — |
|
|
| 752 |
|
|
| — |
|
|
| 758 |
| ||||||||||||||||||||||||||||||||||||
Shares withheld for tax obligations on vested RSUs |
|
| — |
|
|
| — |
|
|
| (82,830 | ) |
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| (1,214 | ) |
|
| — |
|
|
| (1,215 | ) | ||||||||||||||||||||||||||||||||||||
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (54,690 | ) |
|
| (54,690 | ) | ||||||||||||||||||||||||||||||||||||
Balances at March 31, 2021 |
|
| — |
|
| $ | — |
|
|
| 57,515,085 |
|
| $ | 574 |
|
|
| 72,727 |
|
| $ | (260 | ) |
| $ | 600,297 |
|
| $ | (613,552 | ) |
| $ | (12,941 | ) |
See accompanying notes to condensed consolidated financial statements.
SIENTRA, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
| Three Months Ended March 31, |
|
| Three Months Ended March 31, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (28,612 | ) |
| $ | (26,484 | ) |
| $ | (54,690 | ) |
| $ | (28,612 | ) |
Adjustments to reconcile net loss to net cash used in operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment |
|
| 6,432 |
|
|
| — |
|
|
| — |
|
|
| 6,432 |
|
Depreciation and amortization |
|
| 1,228 |
|
|
| 831 |
|
|
| 1,384 |
|
|
| 1,228 |
|
Provision for doubtful accounts |
|
| 357 |
|
|
| 342 |
|
|
| (386 | ) |
|
| 357 |
|
Provision for warranties |
|
| 236 |
|
|
| 273 |
|
|
| 332 |
|
|
| 236 |
|
Provision for inventory |
|
| 1,081 |
|
|
| 289 |
|
|
| 26 |
|
|
| 1,081 |
|
Fair value adjustments of liabilities held at fair value |
|
| 91 |
|
|
| 98 |
| ||||||||
Fair value adjustments to derivative liability |
|
| 42,740 |
|
|
| 130 |
| ||||||||
Fair value adjustments of other liabilities held at fair value |
|
| 17 |
|
|
| (39 | ) | ||||||||
Amortization of debt discount and issuance costs |
|
| 848 |
|
|
| 290 |
| ||||||||
Stock-based compensation expense |
|
| 2,133 |
|
|
| 3,700 |
|
|
| 3,163 |
|
|
| 2,133 |
|
Payments of contingent consideration liability in excess of acquisition-date fair value |
|
| — |
|
|
| (630 | ) | ||||||||
Other non-cash adjustments |
|
| 397 |
|
|
| 56 |
|
|
| 213 |
|
|
| 107 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 1,766 |
|
|
| (2,583 | ) |
|
| (1,544 | ) |
|
| 1,766 |
|
Inventories |
|
| (3,720 | ) |
|
| (3,373 | ) |
|
| (1,933 | ) |
|
| (3,720 | ) |
Prepaid expenses, other current assets and other assets |
|
| (587 | ) |
|
| 396 |
|
|
| (268 | ) |
|
| (587 | ) |
Accounts payable, accrueds, and other liabilities |
|
| (9,867 | ) |
|
| (75 | ) |
|
| (8,443 | ) |
|
| (9,867 | ) |
Customer deposits |
|
| 1,284 |
|
|
| 956 |
|
|
| 4,051 |
|
|
| 1,284 |
|
Sales return liability |
|
| 592 |
|
|
| 1,968 |
|
|
| 1,823 |
|
|
| 592 |
|
Legal settlement payable |
|
| — |
|
|
| (410 | ) | ||||||||
Net cash used in operating activities |
|
| (27,189 | ) |
|
| (24,646 | ) |
|
| (12,667 | ) |
|
| (27,189 | ) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
| (1,206 | ) |
|
| (610 | ) |
|
| (1,321 | ) |
|
| (1,206 | ) |
Net cash used in investing activities |
|
| (1,206 | ) |
|
| (610 | ) |
|
| (1,321 | ) |
|
| (1,206 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from option exercises and employee stock purchase plan |
|
| 534 |
|
|
| 789 |
| ||||||||
Proceeds from issuance of common stock for employee stock-based plans |
|
| 1,132 |
|
|
| 534 |
| ||||||||
Net proceeds from issuance of common stock |
|
| 264 |
|
|
| — |
|
|
| 39,226 |
|
|
| 264 |
|
Tax payments related to shares withheld for vested restricted stock units (RSUs) |
|
| (1,201 | ) |
|
| (2,725 | ) |
|
| (1,215 | ) |
|
| (1,201 | ) |
Gross borrowings under the Revolving Loan |
|
| — |
|
|
| 4,183 |
| ||||||||
Gross borrowings under the Term Loan |
|
| 1,000 |
|
|
| — |
| ||||||||
Repayment of the Revolving Loan |
|
| (6,508 | ) |
|
| (1,565 | ) |
|
| — |
|
|
| (6,508 | ) |
Net proceeds from issuance of the Convertible Note |
|
| 60,000 |
|
|
| — |
|
|
| — |
|
|
| 60,000 |
|
Payments of contingent consideration up to acquisition-date fair value |
|
| — |
|
|
| (370 | ) | ||||||||
Deferred financing costs |
|
| (240 | ) |
|
| — |
|
|
| (750 | ) |
|
| (240 | ) |
Net cash provided by financing activities |
|
| 52,849 |
|
|
| 312 |
|
|
| 39,393 |
|
|
| 52,849 |
|
Net increase in cash, cash equivalents and restricted cash |
|
| 24,454 |
|
|
| (24,944 | ) |
|
| 25,405 |
|
|
| 24,454 |
|
Cash, cash equivalents and restricted cash at: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
| 87,951 |
|
|
| 87,242 |
|
|
| 55,310 |
|
|
| 87,951 |
|
End of period |
| $ | 112,405 |
|
| $ | 62,298 |
|
| $ | 80,715 |
|
| $ | 112,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 112,062 |
|
| $ | 61,955 |
|
|
| 80,372 |
|
| $ | 112,062 |
|
Restricted cash included in other assets |
|
| 343 |
|
|
| 343 |
|
|
| 343 |
|
|
| 343 |
|
Total cash, cash equivalents and restricted cash |
| $ | 112,405 |
|
| $ | 62,298 |
|
| $ | 80,715 |
|
| $ | 112,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
| $ | 1,067 |
|
| $ | 903 |
|
| $ | 1,058 |
|
| $ | 1,067 |
|
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment in accounts payable and accrued liabilities |
| $ | 222 |
|
| $ | 273 |
|
|
| 400 |
|
|
| 222 |
|
Deferred financing costs in accrued liabilities |
|
| 1,275 |
|
|
| — |
| ||||||||
Deferred follow-on offering costs in accounts payable and accrued liabilities |
|
| 122 |
|
|
| — |
| ||||||||
Deferred financing costs in accounts payable and accrued liabilities |
|
| 50 |
|
|
| 1,275 |
|
See accompanying notes to condensed consolidated financial statements.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
|
|
|
|
Sientra, Inc. (“Sientra”, the “Company,” “we,” “our” or “us”), was incorporated in the State of Delaware on August 29, 2003 under the name Juliet Medical, Inc. and subsequently changed its name to Sientra, Inc. in April 2007. The Company acquired substantially all the assets of Silimed, Inc. on April 4, 2007. The purpose of the acquisition was to acquire the rights to the silicone breast implant clinical trials, related product specifications and pre-market approval, or PMA, assets. Following this acquisition, the Company focused on completing the clinical trials to gain FDA approval to offer its silicone gel breast implants in the United States.
In March 2012, the Company announced it had received approval from the FDA for its portfolio of silicone gel breast implants, and in the second quarter of 2012 the Company began commercialization efforts to sell its products in the United States. The Company, based in Santa Barbara, California, is a medical aesthetics company that focuses on serving board-certified plastic surgeons and offers a portfolio of silicone shaped and round breast implants, scar management, tissue expanders, and body contouring products.
In November 2014, the Company completed an initial public offering, or IPO, and its common stock is listed on the Nasdaq Stock Exchange under the symbol “SIEN.”
|
|
On June 11, 2017, Sientra entered into an Agreement and Plan of Merger, or the Merger Agreement, with miraDry (formerly Miramar Labs), pursuant to which Sientra commenced a tender offer to purchase all of the outstanding shares of miraDry’s common stock for (i) $0.3149 per share, plus (ii) the contractual right to receive one or more contingent payments upon the achievement of certain future sales milestones. The total merger consideration was $18.7 million in upfront cash and the contractual rights represent potential contingent payments of up to $14 million. The transaction, which closed on July 25, 2017, added the miraDry System to Sientra’s aesthetics portfolio.
|
|
On November 7, 2019, the Company entered into an Asset Purchase Agreement, or the Purchase Agreement, with Vesta Intermediate Funding, Inc., or Vesta, pursuant to which the Company purchased certain assets and obtained a non-exclusive, royalty-free, perpetual, irrevocable, assignable, sublicensable, and worldwide license to certain intellectual property owned by Vesta, or the Vesta Acquisition. The total consideration was $ 19.1 million in cash, $3.2 million and $3.0 million in cash payable on November 7, 2021 and November 7, 2023, respectively, and two contingent share issuances of up to 303,721 shares each, of the Company’s common stock upon the achievement of certain price targets. The transaction, which closed on November 7, 2019, allows the Company to achieve a greater degree of vertical integration, obtaining direct control of breast implant manufacturing and product development activities and generating production-related cost synergies.
Prior to the asset acquisition on November 7, 2019, the Company engaged Vesta for the manufacture and supply of the Company’s breast implants. On March 14, 2017, the Company announced it had submitted a site-change pre-market approval, or PMA, supplement to the FDA for the manufacture of the Company’s PMA-approved breast implants at the Vesta manufacturing facility. On January 30, 2018, the Company announced the FDA has granted approval of the site-change supplement for the manufacture of its silicone gel breast implants at the Vesta manufacturing facility. In support of the move to the Vesta manufacturing facility, the Company also implemented new manufacturing process improvements which, in consultation with the FDA, required three (3) additional PMA submissions. In addition to approving the manufacturing site-change PMA supplement, the FDA approved the Company’s three (3) process enhancement submissions on January 10, 2018, January 19, 2018 and April 17, 2018.
On May 7, 2018, the Company completed an underwritten follow-on public offering of 7,407,408 shares of its common stock at $13.50 per share, as well as 1,111,111 additional shares of its common stock pursuant to the full exercise of the over-allotment option granted to the underwriters. Net proceeds to the Company were approximately $107.6 million after deducting underwriting discounts and commissions of $6.9 million and offering expenses of approximately $0.5 million.
On June 7, 2019, the Company completed an underwritten follow-on public offering of 17,391,305 shares of its common stock at $5.75 per share, as well as 2,608,695 additional shares of its common stock pursuant to the full exercise of the over-allotment option granted to the underwriters. Net proceeds to the Company were approximately $107.7 million after deducting underwriting discounts and commissions of $6.9 million and offering expenses of approximately $0.4 million.
Further, during the first quarter of 2020, the Company sold 37,000 shares of its common stock under the At-The-Market Equity Offering Sales Agreement with Stifel, Nicolaus & Company, Incorporated which was entered into in February 2018. Net proceeds to the Company after commissions were approximately $0.3 million.
| Summary of Significant Accounting Policies |
| a. | Basis of Presentation |
The accompanying unaudited condensed consolidated financial statements of Sientra, Inc. (“Sientra”, the “Company”, “we”, “our”, or “us”) in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and the rules and regulations of the U.S. Securities and Exchange Commission, or SEC. Accordingly, they do not include certain footnotes and financial presentations normally required under accounting principles generally accepted in the United States of America for complete financial reporting. The interim financial information is unaudited, but reflects all normal adjustments and accruals which are, in the opinion of management, considered necessary to provide a fair presentation for the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20192020 filed with the SEC on March 16, 2020,11, 2021, or the Annual Report. The results for the three months ended March 31, 20202021 are not necessarily indicative of results to be expected for the year ending December 31, 2020,2021, any other interim periods, or any future year or period.
| b. | Liquidity |
Since the Company’s inception, it has incurred significant net operating losses and the Company anticipates that losses will continue in the near term. Although theThe Company expects its operating expenses will begincontinue to decrease withfollowing the implementationcompletion of the organizational efficiency initiative announced on November 7, 2019,in 2020 and other measures introduced as announced in the Company’s filing on Form 8-K on April 7, 2020,sale of the CompanymiraDry business but will need to generate significant net sales to achieve profitability. To date, the Company has funded operations primarily with proceeds from the sales of preferred stock, borrowings under term loans and the convertible note, sales of products since 2012, and the proceeds from the sale of common stock in public offerings. To fund ongoing operating and capital needs, the Company may need to raise additional capital in the future through the sale of equity securities and incremental debt financing.
Debt financing – recent developments
On February 5, 2021, the Company entered into a Second Amended and Restated Credit and Security Agreement (Term Loan), by and among the Company, certain of the Company’s wholly-owned subsidiaries (together with Sientra, the “Borrowers”), the lenders party thereto from time to time and MidCap Financial Trust, as administrative agent and collateral agent (“Agent”) (the “Restated Term Loan Agreement”). The Restated Term Loan Agreement amends and restates the Company’s existing Amended and Restated Credit and Security Agreement (Term Loan), dated as of July 1, 2019.
Also on February 5, 2021, the Company entered in to a Third Amendment to Amended and Restated Credit and Security Agreement (Revolving Loan), by and among the Borrowers, the lenders party thereto from time to time, and the Agent (the “Revolving Loan Amendment”). The Revolving Loan Amendment modified the Net Revenue (as defined therein) requirement in a manner consistent with the modification under the Restated Term Loan Agreement. In addition, the Revolving Loan Amendment made other conforming changes to the Restated Term Loan Agreement.
See Note 6 to the condensed consolidated financial statements for a full description of all of the Company’s long-term debt, revolving line of credit, convertible note, and PPP loan.
Equity financing – recent developments
On February 8, 2021, the Company completed a follow-on public offering of 5,410,628 shares of common stock at $6.75 per share, as well as 811,594 additional shares of common stock pursuant to the full exercise of the over-allotment option granted to the underwriters. Net proceeds were approximately $39.2 million after deducting underwriting discounts and commissions of approximately $2.5 million and offering expenses of approximately $0.3 million.
As of March 31, 2021, the Company had cash and cash equivalents of $80.4 million. The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. As of March 31, 2020, the Company had cash and cash equivalents of $112.1 million. Since inception, the Company has incurred recurring losses from operations and cash outflows from operating activities. The continuation of the Company as a going concern is dependent upon many factors including liquidity and the ability to raise capital. The Company received FDA approval of its PMA supplement on April 17, 2018 and was then able to access a $10.0 million term loan pursuant to an amendment to the credit agreement with MidCap Financial Trust, or MidCap. In addition, in February 2018, the Company entered into an At-The-Market Equity Offering Sales Agreement with Stifel, Nicolaus & Company, Incorporated, or Stifel, as sales agent pursuant to which the Company may sell, from time to time, through Stifel, shares of our common stock having an aggregate gross offering price of up to $50.0
million. As of March 31, 2020, the Company has sold 37,000 shares of its common stock pursuant to the sales agreement, resulting in net proceeds after commissions of approximately $0.3 million. Further, on May 7, 2018 and June 7, 2019, the Company completed public offerings of its common stock, raising approximately $107.6 million and $107.7 million, respectively, in net proceeds after deducting underwriting discounts and commissions and other offering expenses.
On July 1, 2019, the Company entered into certain credit agreements with Midcap Financial Trust pursuant to which the Company repaid its existing indebtedness under its Loan Agreement and the outstanding commitment fee was cancelled. On May 11, 2020, the Company amended certain credit agreements with Midcap Financial Trust pursuant to which the Company repaid certain amounts of its existing indebtedness. See Note 11 – Debt and Note 16 – Subsequent Events for further discussion.
On March 11, 2020, the Company entered into a facility agreement with Deerfield Partners, L.P., issuing $60.0 million in principal amount of 4.0% unsecured and subordinated convertible notes upon the terms and conditions set forth in the facility agreement. See Note 11 – Debt for further discussion.
The Company believes that its cash and cash equivalents will be sufficient to fund its operations for at least the next 12 months.To fund ongoing operating and capital needs, the Company may need to raise additional capital in the future through the sale of equity securities and incremental debt financing.
| c. | Use of Estimates |
The preparation of the condensed consolidated financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
| d. | Recent Accounting Pronouncements |
Recently Adopted Accounting Standards
In August 2018,December 2019, the FASB issued ASU 2018-13, Fair Value Measurement2019-12, Income Taxes (Topic 820) - Disclosure Framework - Changes to740): Simplifying the Disclosure RequirementsAccounting for Fair Value Measurement.Income Taxes. The amendment modifies, removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation, and calculating income taxes in interim periods. The amendment also adds guidance to reduce complexity in certain disclosure requirements on fair value measurements.areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The ASU is effective for annual periods, includingand interim periods within those annual periods,in fiscal years beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. 2020.Early adoption was permitted. The Company adopted the applicable amendments within ASU 2018-13 prospectively2019-12 in the first quarter of 20202021 and there was no material impact on its condensed consolidated financial statements from the adoption.
Recently Issued Accounting Standards
In August 2018,2020, the FASB issued ASU 2018-15, Intangibles - Goodwill2020-06, Debt—Debt with Conversion and Other - Internal-Use SoftwareOptions (Subtopic 350-40) - Customer’s470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Implementation Costs IncurredConvertible Instruments and Contracts in a Cloud Computing Arrangement that is a Service Contract. an Entity’s Own Equity. The amendment alignseliminates certain accounting models and simplifies the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendment.convertible instruments and enhances disclosures for convertible instruments and earnings per share. The ASU isamendments are effective for annual periods,public entities excluding smaller reporting companies for fiscal years beginning after December 15, 2021, including interim periods within those annual periods,fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019. Early2023 including interim periods within those fiscal years and early adoption wasis permitted. The Company adopted ASU 2018-15 prospectively inis currently evaluating the first quarterimpact that adoption of 2020 and there was no material impactthe standard will have on its condensedthe consolidated financial statements from the adoption.
Recently Issued Accounting Standardsstatements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848)-Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendment provides optional expedients and exceptions for contract modifications that replace a reference rate affected by reference rate reform. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022, and entities may elect to apply by Topic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. The Company is currently evaluating the impact the election of the optional expedient will have on the consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendment removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation, and calculating income taxes in interim periods. The amendment also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact that adoption of the standard will have on the consolidated financial statements.
| e. | Risks and Uncertainties |
On March 11, 2020,The rapid, global spread of COVID-19 has resulted in significant economic uncertainty, significant declines in business and consumer confidence and global demand in the World Health Organization declared the outbreak of a novel strain of coronavirus, also known as COVID-19,non-essential healthcare industry (among others), a global pandemic. Dueeconomic slowdown, and could lead to the pandemic, there has been uncertainty and disruption in thea global economy and significant volatility of financial markets.recession. The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, and employee-related amounts, will depend on future developments that are highly uncertain. The Company continues to monitor and assess new information related to the COVID-19 pandemic, the actions taken to contain or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets.
As an aesthetics company, surgical procedures involving the Company'sCompany’s breast and miraDry products are susceptible to local and national government restrictions, such as social distancing, “shelter in place” orders and business closures, due to the economic and logistical impacts these measures have on consumer demand as well as the practitioners’ ability to administer such procedures. The inability or limited ability to perform such non-emergency procedures hassignificantly harmed the Company’s revenues forsince the period endingsecond quarter of 2020 and continued to harm the Company’s revenues during the three months ended March 31, 2020 and2021. While some states have lifted certain restrictions on non-emergency procedures, the Company will likely result incontinue to experience future harm to its revenues while theseexisting or new restrictions remain in place. It is not possible to accurately predict the length or severity of the COVID-19 pandemic or the timing for a broad and sustained ability to perform non-emergency procedures involving the Company’s products.
Further, the spread of COVID-19 has caused the Company to modify workforce practices, and the Company may take further actions determined to be in the best interests of the Company’s employees or as required by governments. In addition, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that this can lead to a local and/or global economic recession, which may result in further harm to the aesthetics market. Such economic disruption could adversely affect the Company’s business. The continued spread of COVID-19, or another infectious disease, could also result in delays or disruptions in the Company’s supply chain or adversely affect the Company’s manufacturing facilities and personnel. Further, trade and/or national security protection policies may be adjusted as a result of the COVID-19 pandemic, such as actions by governments that limit, restrict or prevent the movement of certain goods into a country and/or region, and current U.S./China trade relations may be further exacerbated by the pandemic.
The estimates used for, but not limited to, determining the collectability of accounts receivable, fair value of long-lived assets and goodwill, and sales returns liability required could be impacted by the pandemic. While the full impact of COVID-19 is unknown at this time, the Company has made appropriate estimates based on the facts and circumstances available as of the reporting date. These estimates may change as new events occur and additional information is obtained.
| f. | Reclassifications |
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
On November 7, 2019, the Company announced an organizational efficiency initiative, or the Plan, designed to reduce spending and simplify operations. Under the Plan, the Company will implement numerous initiatives to reduce spending, including closing the Santa Clara offices of miraDry, Inc. and consolidating a number of business support services via a shared services organization at the Company’s Santa Barbara headquarters.
Under the Plan, the Company intends to reduce its workforce by terminating approximately 70 employees. The Company expects to incur total charges of approximately $4.1 million in connection with one-time employee termination costs, retention costs and other benefits. In addition, the Company expects to incur estimated charges of approximately $0.7 million related to contract termination costs, duplicate operating costs, and other associated costs. In total, the Plan is estimated to cost approximately $4.8 million, excluding non-cash charges, with related cash payments expected to be substantially paid out with cash on hand by the end of 2020.
The following table details the amount of the liabilities related to the Plan included in "Accrued and other current liabilities" in the condensed consolidated balance sheet as of March 31, 2020 (amounts in thousands):
|
| Severance costs |
|
| Other associated costs |
| ||
Balance at December 31, 2019 |
| $ | 894 |
|
| $ | — |
|
Costs charged to expense |
|
| 1,642 |
|
|
| 97 |
|
Costs paid or otherwise settled |
|
| (632 | ) |
|
| (97 | ) |
Balance at March 31, 2020 |
| $ | 1,904 |
|
| $ | — |
|
During the three months ended March 31, 2020, the Company recorded $1.7 million of severance and other associated costs related to the Plan. The following table details the charges by reportable segment, recorded in "Restructuring" under operating expenses in the condensed consolidated statements of operations for the three months ended March 31, 2020 by segment (amounts in thousands):
|
| Year Ended |
|
| Three Months |
|
| Cumulative Restructuring |
| |||
|
| December 31, 2019 |
|
| Ended March 31, 2020 |
|
| Charges |
| |||
Breast Products |
| $ | 499 |
|
| $ | 828 |
|
| $ | 1,327 |
|
miraDry |
|
| 584 |
|
|
| 911 |
|
|
| 1,495 |
|
Total |
| $ | 1,083 |
|
| $ | 1,739 |
|
| $ | 2,822 |
|
The Company has incurred cumulative restructuring charges of $2.8 million since the commencement of the restructuring plan through March 31, 2020. It is anticipated that the Company will additionally incur approximately $2.0 million of total restructuring costs during the remainder of 2020, of which $0.1 million would be attributable to the Breast Products segment and $1.9 million would be attributable to the miraDry segment. As the development of the Plan is completed, the Company will update its estimated costs by reportable segment as needed.
| Revenue |
Revenue Recognition
The Company generates revenue primarily through the sale and delivery of promised goods or services to customerscustomers. Sales prices are documented in the executed sales contract, purchase order or order acknowledgement prior to the transfer of control to the customer. Typical payment terms are 30 days for Breast Products and recognizes revenue when control is transferred to customers, in an amount that reflects the consideration the Company expectsdirect sales of consumable miraDry products and tend to be entitledlonger for capital sales of miraDry Systems and sales to in exchange for the goodsmiraDry distributors, but do not extend beyond one year.
Revenue contracts may include multiple products or services.services, each of which is considered a separate performance obligation. Performance obligations typically include the delivery of promised products, such as breast implants, tissue expanders, BIOCORNEUM, miraDry Systems and bioTips, along with service-type warranties and deliverables under certain marketing programs.warranties. Other
deliverables are sometimes promised but are ancillary and insignificant in the context of the contract as a whole. SalesRevenue is allocated to each performance obligation based on its relative standalone selling price. The Company determines standalone selling prices based on observable prices for all performance obligations with the exception of the service-type warranty under the Platinum20 Limited Warranty Program, or Platinum20.
The liability for unsatisfied performance obligations under the service warranty as of March 31, 2021 were as follows:
|
| Three Months Ended March 31, |
| |
|
| 2021 |
| |
Balance as of December 31, 2020 |
| $ | 2,618 |
|
Additions and adjustments |
|
| 427 |
|
Revenue recognized |
|
| (373 | ) |
Balance as of March 31, 2021 |
| $ | 2,672 |
|
Revenue for service warranties are documented inrecognized ratably over the executed sales contract, purchase order or order acknowledgement prior toterm of the transfer of control toagreements. Specifically for Platinum20, the customer. Customers may enter into a separate extended service agreement to purchase an extended warranty for miraDry products from the Company whereby the paymentperformance obligation is duesatisfied at the inception oftime that the agreement. Typical payment termsbenefits are 30 daysprovided and are expected to be satisfied over the following 3 to 24 month period for Breast Productsfinancial assistance and direct sales of consumable miraDry products, and tend to be
longer20 years for capital sales of miraDry Systems and sales to miraDry distributors, but do not extend beyond one year. product replacement.
For delivery of promised products, control transfers and revenue is recognized upon shipment, unless the contractual arrangement requires transfer of control when products reach their destination, for which revenue is recognized once the product arrives at its destination. Revenue for extended service agreements are recognized ratably over the term of the agreements.
For Breast Products, with the exception of the Company’s BIOCORNEUM scar management products, the Company allows for the return of products from customers within six months after the original sale, which is accounted for as variable consideration. Reserves are established for anticipated sales returns based on the expected amount calculated with historical experience, recent gross sales and any notification of pending returns. The estimated sales return is recorded as a reduction of revenue and as a sales return liability in the same period revenue is recognized. Actual sales returns in any future period are inherently uncertain and thus may differ from the estimates. If actual sales returns differ significantly from the estimates, an adjustment to revenue in the current or subsequent period would be recorded. The Company has established an allowance for sales returns of $8.7 million and $8.1 million as of March 31, 2020 and December 31, 2019 respectively, recorded as “sales return liability” on the condensed consolidated balance sheets.
The following table provides a rollforward of the sales return liability (in thousands):
|
| Sales return liability |
| |
Balance as of December 31, 2019 |
| $ | 8,116 |
|
Addition to reserve for sales activity |
|
| 28,538 |
|
Actual returns |
|
| (28,074 | ) |
Change in estimate of sales returns |
|
| 127 |
|
Balance as of March 31, 2020 |
| $ | 8,707 |
|
For Breast Products, a portion of the Company’s revenue is generated from the sale of consigned inventory of breast implants maintained at doctor, hospital, and clinic locations. For these products, revenue is recognized at the time the Company is notified by the customer that the product has been implanted, not when the consigned products are delivered to the customer’s location.
For miraDry, in addition to domestic and international direct sales, the Company leverages a distributor network for selling the miraDry System internationally. The Company recognizes revenue when control of the goods or services is transferred to the distributors. Standard terms in both direct sales agreements (domestic and international), and international distributor agreements do not allow for trial periods, right of return, refunds, payment contingent on obtaining financing or other terms that could impact the customer’s payment obligation.
Arrangements with Multiple Performance ObligationsSales Return Liability
The Company has determined that the delivery of each unit of product in the Company’s revenue contracts with customers is a separate performance obligation. The Company’s revenue contracts may include multiple products or services, each of which is considered a separate performance obligation. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on observable prices or using an expected cost plus margin approach when an observable price is not available. The Company invoices customers once products are shipped or delivered to customers depending on the negotiated shipping terms.
The Company introduced its Platinum20 Limited Warranty Program, or Platinum20, in May 2018 on all OPUS breast implants implanted in the United States or Puerto Rico on or after May 1, 2018. Platinum20 provides for financial assistance for revision surgeries and no-charge contralateral replacement implants upon the occurrence of certain qualifying events. The Company considers Platinum20 to have an assurance warranty component and a service warranty component. The assurance component is recorded as a warranty liability at the time of sale (as discussed in Note 7). The Company considers the service warranty component as an additional performance obligation and defers revenue at the time of sale based on the relative estimated selling price, by estimating a standalone selling price using the expected cost plus margin approach for the performance obligation. Inputs into the
expected cost plus margin approach include historical incidence rates, estimated replacement costs, estimated financial assistance payouts and an estimated margin. The liability for unsatisfied performance obligations under the service warranty as of March 31, 2020 and December 31, 2019 was $1.3 million and $1.2 million, respectively. The short-term obligation related to the service warranty as of both March 31, 2020 and December 31, 2019 was $0.5 million and is included in “accrued and other current liabilities” on the condensed consolidated balance sheets. The long-term obligation related to the service warranty as of March 31, 2020 and December 31, 2019 was $0.8 million and $0.7 million, respectively, and is included in “warranty reserve and other long-term liabilities” on the condensed consolidated balance sheets. The performance obligation is satisfied at the time that Platinum20 benefits are provided and are expected to be satisfied over the following 3 to 24 month period for financial assistance and 20 years for product replacement. Revenue recognized for the service warranty performance obligations for the three months ended March 31, 2020 was immaterial.
Practical Expedients and Policy Election
The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.
The Company does not adjust accounts receivable for the effects of any significant financing components as customer payment terms are shorter than one year.
The Company has elected to account for shipping and handling activities performed after a customer obtains control of the products as activities to fulfill the promise to transfer the products to the customer. Shipping and handling activities are largely provided to customers free of charge for theFor Breast Products, segment. The associated costs were $0.7 million and $0.4 million forwith the three months ended March 31, 2020 and 2019, respectively. These costs are viewed as partexception of the Company’s BIOCORNEUM scar management products, the Company allows for the return of products from customers within six months after the original sale, which is accounted for as variable consideration. A sales return liability is established based on estimated returns using relevant historical experience taking into consideration recent gross sales and marketing programsnotifications of pending returns, as adjusted for changes in recent industry events and trends. The estimated sales returns are recorded as a componentreduction of revenue and as a sales and marketing expensereturn liability in the condensed consolidated statement of operations assame period revenue is recognized. Actual sales returns in any future period are inherently uncertain and thus may differ from the estimates. If actual sales returns differ significantly from the estimates, an accounting policy election. For the miraDry segment, shipping and handling charges are typically billedadjustment to customers and recorded as revenue. The shipping and handling costs incurred are recorded as a component of cost of goods soldrevenue in the condensed consolidated statementcurrent or subsequent period would be recorded. The following table provides a rollforward of operations. The associated costs were $0.1 million for both the three months ended March 31, 2020 and 2019.sales return liability (in thousands):
|
| Three Months Ended March 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Beginning balance |
| $ | 9,192 |
|
| $ | 8,116 |
|
Addition to reserve for sales activity |
|
| 36,386 |
|
|
| 28,538 |
|
Actual returns |
|
| (33,700 | ) |
|
| (28,074 | ) |
Change in estimate of sales returns |
|
| (858 | ) |
|
| 127 |
|
Ending balance |
| $ | 11,020 |
|
| $ | 8,707 |
|
| Fair Value of Financial Instruments |
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, customer deposits and sales return liability are reasonable estimates of their fair value because of the short maturity of these items. The fair value of the common stock warrant liability, contingent consideration, and the convertible feature related to the convertible note are discussed in Note 6.4. The fair value of the debt is based on the amount of future cash flows associated with the instrument discounted using the Company’s estimated market rate. As of March 31, 2020,2021, the carrying value of the long-term debt and convertible note was not materially different from the fair value. As of March 31, 2021, the carrying value and fair value of the convertible note were as follows (in thousands):
|
| March 31, 2021 |
| |||||
|
| Carrying Value |
|
| Fair Value |
| ||
Convertible note |
| $ | 45,131 |
|
| $ | 39,080 |
|
|
|
a. | Inventories |
Inventories, net consist of the following (in thousands):
|
| March 31, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Raw materials |
| $ | 5,985 |
|
| $ | 7,138 |
|
Work in progress |
|
| 8,454 |
|
|
| 12,303 |
|
Finished goods |
|
| 32,184 |
|
|
| 25,791 |
|
Finished goods - right of return |
|
| 3,933 |
|
|
| 3,416 |
|
|
| $ | 50,556 |
|
| $ | 48,648 |
|
b. | Property and Equipment |
Property and equipment, net consist of the following (in thousands):
|
| March 31, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Leasehold improvements |
| $ | 2,909 |
|
| $ | 2,857 |
|
Manufacturing equipment and toolings |
|
| 9,598 |
|
|
| 9,289 |
|
Computer equipment |
|
| 3,013 |
|
|
| 2,776 |
|
Software |
|
| 4,206 |
|
|
| 3,546 |
|
Office equipment |
|
| 167 |
|
|
| 167 |
|
Furniture and fixtures |
|
| 1,243 |
|
|
| 1,193 |
|
|
|
| 21,136 |
|
|
| 19,828 |
|
Less accumulated depreciation |
|
| (7,748 | ) |
|
| (6,722 | ) |
|
| $ | 13,388 |
|
| $ | 13,106 |
|
Depreciation expense for the three months ended March 31, 2021 and 2020 was $1.1 million and $0.7 million, respectively.
c. | Goodwill and Other Intangible Assets, net |
The Company has determined that it has two reporting units, Breast Products and miraDry, and evaluates goodwill for impairment at least annually on October 1st and whenever circumstances suggest that goodwill may be impaired.
The changes in the carrying amount of goodwill during the three months ended March 31, 2021 and the year ended December 31, 2020 were as follows (in thousands):
|
| Breast Products |
|
| miraDry |
|
| Total |
| |||
Balances as of December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
| 23,480 |
|
|
| 7,629 |
|
|
| 31,109 |
|
Accumulated impairment losses |
|
| (14,278 | ) |
|
| (7,629 | ) |
|
| (21,907 | ) |
Goodwill, net |
| $ | 9,202 |
|
| $ | — |
|
| $ | 9,202 |
|
Balances as of March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
| 23,480 |
|
|
| 7,629 |
|
|
| 31,109 |
|
Accumulated impairment losses |
|
| (14,278 | ) |
|
| (7,629 | ) |
|
| (21,907 | ) |
Goodwill, net |
| $ | 9,202 |
|
| $ | — |
|
| $ | 9,202 |
|
As of March 31, 2021, the Breast Products reporting unit had a negative carrying value.
The components of the Company’s other intangible assets consist of the following (in thousands):
|
| Average |
|
|
|
| ||||||||||
|
| Amortization |
|
| March 31, 2021 |
| ||||||||||
|
| Period |
|
| Gross Carrying |
|
| Accumulated |
|
| Intangible |
| ||||
|
| (in years) |
|
| Amount |
|
| Amortization |
|
| Assets, net |
| ||||
Intangibles with definite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
| 10 |
|
| $ | 4,940 |
|
| $ | (3,948 | ) |
| $ | 992 |
|
Trade names - finite life |
|
| 12 |
|
|
| 800 |
|
|
| (339 | ) |
|
| 461 |
|
Non-compete agreement |
|
| 2 |
|
|
| 80 |
|
|
| (80 | ) |
|
| — |
|
Regulatory approvals |
|
| 1 |
|
|
| 670 |
|
|
| (670 | ) |
|
| — |
|
Acquired FDA non-gel product approval |
|
| 11 |
|
|
| 1,713 |
|
|
| (1,713 | ) |
|
| — |
|
Manufacturing know-how |
|
| 19 |
|
|
| 8,240 |
|
|
| (1,062 | ) |
|
| 7,178 |
|
Total definite-lived intangible assets |
|
|
|
|
| $ | 16,443 |
|
| $ | (7,812 | ) |
| $ | 8,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles with indefinite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names - indefinite life |
| — |
|
|
| 450 |
|
|
| — |
|
|
| 450 |
| |
Total indefinite-lived intangible assets |
|
|
|
|
| $ | 450 |
|
| $ | — |
|
| $ | 450 |
|
|
| Average |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Amortization |
|
| December 31, 2020 |
| ||||||||||
|
| Period |
|
| Gross Carrying |
|
| Accumulated |
|
| Intangible |
| ||||
|
| (in years) |
|
| Amount |
|
| Amortization |
|
| Assets, net |
| ||||
Intangibles with definite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
| 10 |
|
| $ | 4,940 |
|
| $ | (3,856 | ) |
| $ | 1,084 |
|
Trade names - finite life |
|
| 12 |
|
|
| 800 |
|
|
| (322 | ) |
|
| 478 |
|
Non-compete agreement |
|
| 2 |
|
|
| 80 |
|
|
| (80 | ) |
|
| — |
|
Regulatory approvals |
|
| 1 |
|
|
| 670 |
|
|
| (670 | ) |
|
| — |
|
Acquired FDA non-gel product approval |
|
| 11 |
|
|
| 1,713 |
|
|
| (1,713 | ) |
|
| — |
|
Manufacturing know-how |
|
| 19 |
|
|
| 8,240 |
|
|
| (865 | ) |
|
| 7,375 |
|
Total definite-lived intangible assets |
|
|
|
|
| $ | 16,443 |
|
| $ | (7,506 | ) |
| $ | 8,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles with indefinite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names - indefinite life |
| — |
|
|
| 450 |
|
|
| — |
|
|
| 450 |
| |
Total indefinite-lived intangible assets |
|
|
|
|
| $ | 450 |
|
| $ | — |
|
| $ | 450 |
|
Amortization expense for the three months ended March 31, 2021 and 2020 was $0.3 million and $0.6 million, respectively. The following table summarizes the estimated amortization expense relating to the Company's definite-lived intangible assets as of March 31, 2021 (in thousands):
|
| Amortization |
| |
Period |
| Expense |
| |
2021 |
| $ | 916 |
|
2022 |
|
| 1,163 |
|
2023 |
|
| 1,092 |
|
2024 |
|
| 948 |
|
2025 |
|
| 805 |
|
Thereafter |
|
| 3,707 |
|
|
| $ | 8,631 |
|
d. | Accrued and Other Current Liabilities |
Accrued and other current liabilities consist of the following (in thousands):
|
| March 31, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Payroll and related expenses |
| $ | 3,445 |
|
| $ | 3,524 |
|
Accrued severance |
|
| 389 |
|
|
| 2,900 |
|
Accrued commissions |
|
| 3,924 |
|
|
| 5,561 |
|
Accrued manufacturing |
|
| 278 |
|
|
| 225 |
|
Deferred and contingent consideration, current portion |
|
| 10,163 |
|
|
| 10,146 |
|
Audit, consulting and legal fees |
|
| 81 |
|
|
| 48 |
|
Accrued sales and marketing expenses |
|
| 519 |
|
|
| 445 |
|
Lease liabilities |
|
| 1,565 |
|
|
| 1,588 |
|
Other |
|
| 6,571 |
|
|
| 7,952 |
|
|
| $ | 26,935 |
|
| $ | 32,389 |
|
e. | Accrued warranties |
The following table provides a rollforward of the accrued assurance-type warranties (in thousands):
|
| Three Months Ended March 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Balance as of January 1 |
| $ | 2,001 |
|
| $ | 1,562 |
|
Warranty costs incurred during the period |
|
| (175 | ) |
|
| (185 | ) |
Changes in accrual related to warranties issued during the period |
|
| 326 |
|
|
| 242 |
|
Changes in accrual related to pre-existing warranties |
|
| 6 |
|
|
| (6 | ) |
Balance as of March 31 |
| $ | 2,158 |
|
| $ | 1,613 |
|
As of March 31, 2021, $2.1 million is included in “Warranty reserve and other long-term liabilities”, and $0.1 million is included in “Accrued and other current liabilities”. As of March 31, 2020, $1.5 million is included in “Warranty reserve and other long-term liabilities”, and $0.1 million is included in “Accrued and other current liabilities”.
f. | Liabilities measured at fair value |
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
• | Level 1 — Quoted prices in active markets for identical assets or liabilities. |
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
• | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. |
Common Stock Warrantsstock warrants
The Company’s common stock warrant liabilities are carried at fair value determined according to the fair value hierarchy described above. The Company has utilized an option pricing valuation model to determine the fair value of its outstanding common stock warrant liabilities. The inputs to the model include fair value of the common stock related to the warrant, exercise price of the warrant, expected term, expected volatility, risk-free interest rate and dividend yield. The warrants are valued using the fair value of common stock as of the measurement date. The Company estimates its expected stock volatility based on company-specific historical and implied volatility information of its stock. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrants. The Company has estimated a 0% dividend yield based on the expected dividend yield and the fact that the Company has never paid or declared dividends. As of March 31, 2020,several significant inputs are not observable, the overall fair value measurement of the warrants was immaterialis classified as a result of the decline in the Company’s stock price.Level 3.
Contingent Considerationconsideration
The Company assessed the fair value of the contingent consideration for future royalty payments related to the acquisition of BIOCORNEUM and the contingent consideration for the future milestone payments related to the acquisition of miraDry using a Monte-Carlo simulation model. The contingent consideration related to the acquisition of BIOCORNEUM consist of royalty obligations based on future net sales for a defined term, beginning in 2024. The significant assumption utilized in the fair value measurement was the revenue discount rate, which was 19.0%21.0%. The contingent consideration for future milestone payments related to the acquisition of miraDry is based on the timing of achievement of target net sales, which is estimated based on an internal management forecast. The significant assumption utilized in the fair value measurement was the miraDry company discount rate, which was 11.2%. As these inputs are not observable, the overall fair value measurement of the contingent consideration is classified as Level 3. During the quarter ended March 31, 2020, there were no material changes to
Derivative liability
The Company assesses on a quarterly basis the fair value of the contingent consideration.
Convertible note conversion feature
The Company assessed the fair value ofderivative liability associated with the conversion feature related toin the convertible note due in 2025. The conversion feature was bifurcated and recorded as a current derivative liability on the condensed consolidated balance sheetsheets with a corresponding discount at the date of issuance that is netted against the principal amount of the note. The Company has utilizedutilizes a binomial lattice method to determine the fair value of the conversion feature, which utilizes inputs including the common stock price, volatility of common stock, the risk-free interest rate and the probability of conversion to common shares at the Base Conversion Rate and in the event of a major transaction (e.g. a change in control). As the probability of conversion is a significant unobservable input, the overall fair value measurement of the conversion feature is classified as levelLevel 3.
The following tables present information about the Company’s liabilities that are measured at fair value on a recurring basis as of March 31, 20202021 and December 31, 20192020 and indicate the level of the fair value hierarchy utilized to determine such fair value (in thousands):
|
| Fair Value Measurements as of |
|
| Fair Value Measurements as of |
| ||||||||||||||||||||||||||
|
| March 31, 2020 Using: |
|
| March 31, 2021 Using: |
| ||||||||||||||||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for common stock warrants |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| ||||||||||||||||
Liability for contingent consideration |
| $ | — |
|
|
| — |
|
|
| 6,891 |
|
|
| 6,891 |
|
|
| — |
|
|
| — |
|
|
| 7,044 |
|
|
| 7,044 |
|
Liability for convertible note conversion feature |
|
| — |
|
|
| — |
|
|
| 16,230 |
|
|
| 16,230 |
| ||||||||||||||||
Liability for derivative |
|
| — |
|
|
| — |
|
|
| 69,310 |
|
|
| 69,310 |
| ||||||||||||||||
|
| $ | — |
|
|
| — |
|
|
| 23,121 |
|
|
| 23,121 |
|
| $ | — |
|
| $ | — |
|
| $ | 76,354 |
|
| $ | 76,354 |
|
|
| Fair Value Measurements as of |
|
| Fair Value Measurements as of |
| ||||||||||||||||||||||||||
|
| December 31, 2019 Using: |
|
| December 31, 2020 Using: |
| ||||||||||||||||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for common stock warrants |
| $ | — |
|
|
| — |
|
|
| 38 |
|
|
| 38 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Liability for contingent consideration |
|
| — |
|
|
| — |
|
|
| 6,891 |
|
|
| 6,891 |
|
|
| — |
|
|
| — |
|
|
| 7,026 |
|
|
| 7,026 |
|
Liability for derivative |
|
| — |
|
|
| — |
|
|
| 26,570 |
|
|
| 26,570 |
| ||||||||||||||||
|
| $ | — |
|
|
| — |
|
|
| 6,929 |
|
|
| 6,929 |
|
| $ | — |
|
| $ | — |
|
| $ | 33,596 |
|
| $ | 33,596 |
|
The following table provides a rollforward of the aggregate fair values of the Company’s liabilities for which fair value is determined by Level 3 inputs (in thousands):
|
|
|
|
|
|
|
|
|
|
| Contingent consideration liability |
|
| Derivative liability |
| ||
Balance, December 31, 2020 |
| $ | 7,026 |
|
| $ | 26,570 |
|
Change in fair value |
|
| 18 |
|
|
| 42,740 |
|
Balance, March 31, 2021 |
| $ | 7,044 |
|
| $ | 69,310 |
|
The liability for the current portion of contingent consideration is included in “accrued“Accrued and other current liabilities” and the long-term portion is included in “deferred“Deferred and contingent consideration” in the condensed consolidated balance sheet.sheets. The liability for the conversion feature related to the convertible note is included in “derivative“Derivative liability” in the condensed consolidated balance sheet.sheets.
The Company recognizes changes in the fair value of the derivative liability in “other income (expense), net”“Change in fair value of derivative liability” in the condensed consolidated statement of operations and changes in the contingent consideration are recognized in “general“General and administrative” expense in the condensed consolidated statement of operations.
|
|
The Company offers a product replacement and limited warranty program for the Company’s silicone gel breast implants, and a product warranty for the Company’s miraDry Systems and consumable bioTips. For silicone gel breast implant surgeries occurring prior to May 1, 2018, the Company provides lifetime replacement implants and up to $3,600 in financial assistance for revision surgeries, for covered rupture events that occur within ten years of the surgery date. The Company introduced its Platinum20 Limited Warranty Program in May 2018, covering OPUS silicone gel breast implants implanted in the United States or Puerto Rico on or after May 1, 2018. The Company considers the program to have an assurance warranty component and a service warranty component. The service warranty component is discussed in Note 4 above. The assurance component is related to the lifetime no-charge contralateral replacement implants and up to $5,000 in financial assistance for revision surgeries, for covered rupture events that occur within twenty years of the surgery date. Under the miraDry warranty, the Company provides a standard product warranty for the miraDry System and bioTips, which the Company considers an assurance-type warranty.
The following table provides a rollforward of the accrued warranties (in thousands):
|
| Three Months Ended March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Balance as of January 1 |
| $ | 1,562 |
|
| $ | 1,395 |
|
Warranty costs incurred during the period |
|
| (185 | ) |
|
| (139 | ) |
Changes in accrual related to warranties issued during the period |
|
| 242 |
|
|
| 244 |
|
Changes in accrual related to pre-existing warranties |
|
| (6 | ) |
|
| 29 |
|
Balance as of March 31 |
| $ | 1,613 |
|
| $ | 1,529 |
|
Basic net loss per share attributable to common stockholders is computed by dividing net loss by the weighted average number of common shares outstanding during each period. Diluted net loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares and dilutive potential common share equivalents then outstanding, to the extent they are dilutive. Potential common shares consist of shares issuable upon the exercise of stock options and warrants (using the treasury stock method). Dilutive net loss per share is the same as basic net loss per share for all periods presented because the effects of potentially dilutive items were anti-dilutive.
|
| Three Months Ended March 31, |
| |||||
|
| 2020 |
| 2019 |
| |||
Net loss (in thousands) |
| $ | (28,612 | ) |
| $ | (26,484 | ) |
Weighted average common shares outstanding, basic and diluted |
|
| 49,916,412 |
|
|
| 29,099,382 |
|
Net loss per share attributable to common stockholders |
| $ | (0.57 | ) |
| $ | (0.91 | ) |
The Company excluded the following potentially dilutive securities, outstanding as of March 31, 2020 and 2019, from the computation of diluted net loss per share attributable to common stockholders for the three months ended March 31, 2020 and 2019 because they had an anti-dilutive impact due to the net loss attributable to common stockholders incurred for the periods.
|
| March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Stock options to purchase common stock |
|
| 1,590,903 |
|
|
| 1,907,938 |
|
Warrants for the purchase of common stock |
|
| 32,375 |
|
|
| 47,710 |
|
Equity contingent consideration |
|
| 607,442 |
|
|
| — |
|
Stock issuable upon conversion of convertible note |
|
| 19,733,352 |
|
|
| — |
|
|
|
| 21,964,072 |
|
|
| 1,955,648 |
|
The Company uses the if-converted method for calculating any potential dilutive effects of the convertible note. The Company did not adjust the net loss for the quarter ended March 31, 2020 to eliminate any interest expense or gain/loss for the derivative liability related to the note in the computation of diluted loss per share, as the effects would be anti-dilutive. Further, the Company excluded from diluted weighted average shares approximately 14.6 million shares issuable upon conversion for the quarter ended March 31, 2020, as the effects would be anti-dilutive.
|
|
|
|
Inventories, net consist of the following (in thousands):
|
| March 31, |
|
| December 31, |
| ||
|
| 2020 |
|
| 2019 |
| ||
Raw materials |
| $ | 7,175 |
|
| $ | 8,095 |
|
Work in progress |
|
| 5,254 |
|
|
| 5,543 |
|
Finished goods |
|
| 27,264 |
|
|
| 23,893 |
|
Finished goods - right of return |
|
| 2,425 |
|
|
| 2,081 |
|
|
| $ | 42,118 |
|
| $ | 39,612 |
|
Property and equipment, net consist of the following (in thousands):
|
| March 31, |
|
| December 31, |
| ||
|
| 2020 |
|
| 2019 |
| ||
Leasehold improvements |
| $ | 2,857 |
|
| $ | 2,841 |
|
Manufacturing equipment and toolings |
|
| 8,481 |
|
|
| 8,175 |
|
Computer equipment |
|
| 1,524 |
|
|
| 1,250 |
|
Software |
|
| 2,652 |
|
|
| 2,602 |
|
Office equipment |
|
| 129 |
|
|
| 111 |
|
Furniture and fixtures |
|
| 1,162 |
|
|
| 1,144 |
|
|
|
| 16,805 |
|
|
| 16,123 |
|
Less accumulated depreciation |
|
| (4,461 | ) |
|
| (3,809 | ) |
|
| $ | 12,344 |
|
| $ | 12,314 |
|
Depreciation expense for the three months ended March 31, 2020 and 2019 was $0.7 million and $0.3 million, respectively.
|
|
The Company has determined that it has two reporting units, Breast Products and miraDry, and evaluates goodwill for impairment at least annually on October 1st and whenever circumstances suggest that goodwill may be impaired.
The changes in the carrying amount of goodwill during the three months ended March 31, 2020 and the year ended December 31, 2019 were as follows (in thousands):
|
| Breast Products |
|
| miraDry |
|
| Total |
| |||
Balances as of December 31, 2018 |
| $ | 4,878 |
|
| $ | 7,629 |
|
| $ | 12,507 |
|
Goodwill acquired |
|
| 4,324 |
|
|
| — |
|
|
| 4,324 |
|
Accumulated impairment losses |
|
| — |
|
|
| (7,629 | ) |
|
| (7,629 | ) |
Balances as of December 31, 2019 |
| $ | 9,202 |
|
| $ | — |
|
| $ | 9,202 |
|
Goodwill acquired |
|
| — |
|
|
| — |
|
|
| — |
|
Balances as of March 31, 2020 |
| $ | 9,202 |
|
| $ | — |
|
| $ | 9,202 |
|
In the first quarter of 2020, the Company noted a decline in actual and forecasted earnings for the miraDry reporting unit due to the effects and uncertainty surrounding the COVID-19 pandemic. As a result, the Company performed a test of recoverability by comparing the carrying value of the reporting unit to the future undiscounted cash flows the reporting unit is expected to generate. As the future undiscounted cash flows attributable to the asset group were less than the carrying value, the Company performed a quantitative analysis to compare the fair value of the intangible assets in the reporting unit to their carrying amount.
The Company’s fair value analysis of intangible assets utilizes methods under various income approaches. The Company values its customer relationships using an excess earnings method, which assumes the value of the asset is the discounted future cash flows derived from existing customers and requires the use of customer attrition rates and discount rates to determine the estimated fair value. The future revenues and free cash flow from existing customers are determined based upon actual results giving effect to management’s expected changes in operating results in future years. The attrition rate is based on average historical levels of customer attrition and the discount rate is based upon market participant assumptions using a defined peer group. Tradenames and developed technology are valued using a relief from royalty method, which assumes the value of the asset is the discounted cash flows of the amount that would be paid by a hypothetical market participant had they not owned the asset and instead licensed the asset from another company. This method requires the use of royalty rates which are determined based on comparable third party license agreements involving similar assets and discount rates similar to the above to determine the estimated fair value.
After performing the impairment analysis as of March 31, 2020, the Company determined that the carrying values of all of the intangible assets in the miraDry reporting unit exceeded their estimated fair values. Consequently, the Company recorded total non-cash impairment charges of $1.1 million for trade names, $1.4 million for developed technology, and $3.9 million for customer relationships within impairment in the accompanying condensed consolidated statement of operations for the quarter ended March 31, 2020. As March 31, 2020, the remaining carrying value of the intangible assets are entirely associated with the Breast Products segment.
The components of the Company’s other intangible assets consist of the following (in thousands):
|
| Average |
|
|
|
| ||||||||||
|
| Amortization |
|
| March 31, 2020 |
| ||||||||||
|
| Period |
|
| Gross Carrying |
|
| Accumulated |
|
| Intangible |
| ||||
|
| (in years) |
|
| Amount |
|
| Amortization |
|
| Assets, net |
| ||||
Intangibles with definite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
| 10 |
|
| $ | 4,940 |
|
| $ | (3,470 | ) |
| $ | 1,470 |
|
Trade names - finite life |
|
| 12 |
|
|
| 800 |
|
|
| (272 | ) |
|
| 528 |
|
Non-compete agreement |
|
| 2 |
|
|
| 80 |
|
|
| (80 | ) |
|
| — |
|
Regulatory approvals |
|
| 1 |
|
|
| 670 |
|
|
| (670 | ) |
|
| — |
|
Acquired FDA non-gel product approval |
|
| 11 |
|
|
| 1,713 |
|
|
| (1,713 | ) |
|
| — |
|
Manufacturing know-how |
|
| 19 |
|
|
| 8,240 |
|
|
| (305 | ) |
|
| 7,935 |
|
Total definite-lived intangible assets |
|
|
|
|
| $ | 16,443 |
|
| $ | (6,510 | ) |
| $ | 9,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles with indefinite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names - indefinite life |
| — |
|
|
| 450 |
|
|
| — |
|
|
| 450 |
| |
Total indefinite-lived intangible assets |
|
|
|
|
| $ | 450 |
|
| $ | — |
|
| $ | 450 |
|
|
| Average |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Amortization |
|
| December 31, 2019 |
| ||||||||||
|
| Period |
|
| Gross Carrying |
|
| Accumulated |
|
| Intangible |
| ||||
|
| (in years) |
|
| Amount |
|
| Amortization |
|
| Assets, net |
| ||||
Intangibles with definite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
| 11 |
|
| $ | 9,540 |
|
| $ | (3,846 | ) |
| $ | 5,694 |
|
Trade names - finite life |
|
| 14 |
|
|
| 2,000 |
|
|
| (292 | ) |
|
| 1,708 |
|
Developed technology |
|
| 13 |
|
|
| 1,500 |
|
|
| (84 | ) |
|
| 1,416 |
|
Non-compete agreement |
|
| 2 |
|
|
| 80 |
|
|
| (80 | ) |
|
| — |
|
Regulatory approvals |
|
| 1 |
|
|
| 670 |
|
|
| (670 | ) |
|
| — |
|
Acquired FDA non-gel product approval |
|
| 11 |
|
|
| 1,713 |
|
|
| (1,713 | ) |
|
| — |
|
Manufacturing know-how |
|
| 19 |
|
|
| 8,240 |
|
|
| (118 | ) |
|
| 8,122 |
|
Total definite-lived intangible assets |
|
|
|
|
| $ | 23,743 |
|
| $ | (6,803 | ) |
| $ | 16,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles with indefinite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names - indefinite life |
| — |
|
|
| 450 |
|
|
| — |
|
|
| 450 |
| |
Total indefinite-lived intangible assets |
|
|
|
|
| $ | 450 |
|
| $ | — |
|
| $ | 450 |
|
Amortization expense for the three months ended March 31, 2020 and 2019 was $0.6 million. The following table summarizes the estimated amortization expense relating to the Company's definite-lived intangible assets as of March 31, 2020 (in thousands):
|
| Amortization |
| |
Period |
| Expense |
| |
2020 |
| $ | 997 |
|
2021 |
|
| 1,221 |
|
2022 |
|
| 1,163 |
|
2023 |
|
| 1,092 |
|
2024 |
|
| 948 |
|
Thereafter |
|
| 4,512 |
|
|
| $ | 9,933 |
|
|
|
Accrued and other current liabilities consist of the following (in thousands):
|
| March 31, |
|
| December 31, |
| ||
|
| 2020 |
|
| 2019 |
| ||
Payroll and related expenses |
| $ | 3,341 |
|
| $ | 6,789 |
|
Accrued severance |
|
| 1,904 |
|
|
| 894 |
|
Accrued commissions |
|
| 3,830 |
|
|
| 4,984 |
|
Accrued equipment |
|
| 116 |
|
|
| 400 |
|
Accrued inventory |
|
| 525 |
|
|
| 2,216 |
|
Deferred and contingent consideration, current portion |
|
| 6,830 |
|
|
| 6,830 |
|
Audit, consulting and legal fees |
|
| 260 |
|
|
| 630 |
|
Accrued sales and marketing expenses |
|
| 1,357 |
|
|
| 1,109 |
|
Operating lease liabilities |
|
| 1,430 |
|
|
| 1,259 |
|
Finance lease liabilities |
|
| 54 |
|
|
| 40 |
|
Other |
|
| 6,755 |
|
|
| 7,400 |
|
|
| $ | 26,402 |
|
| $ | 32,551 |
|
| Leases |
The Company leases certain office space, warehouses, distribution facilities and office equipment. The Company determines if an arrangement contains a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the asset.
Operating and finance lease right-of-use, or ROU, assets and lease liabilities are recognized based on the present value of the future lease payments over the lease term at the commencement date. The Company determines its incremental borrowing rate based on the information available at the commencement date in determining the lease liabilities as the Company’s leases generally do not provide an implicit rate. The ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. Lease terms may include options to extend or terminate when the Company is reasonably certain that the option will be exercised. The Company elected to apply the short-term lease measurement and recognition exemption in which ROU assets and lease liabilities are not recognized for short-term leases. The Company’s lease agreements generally do not contain material residual value guarantees or material restrictive covenants.
The Company’s leases of office space, warehouses and distribution facilities are treated as operating leases and often contain lease and non-lease components. The Company has elected to account for these lease and non-lease components separately. Non-lease components for these assets are primarily comprised of common-area maintenance, utilities, and real estate taxes that are passed on from the lessor in proportion to the space leased by the Company, and are recognized in operating expenses in the period in which the obligation for those payments was incurred. Lease cost for these operating leases is recognized on a straight-line basis over the lease term in operating expenses.
The Company’s leases of office equipment are accounted for as finance leases as they meet one or more of the five finance lease classification criteria. Lease cost for these finance leases is comprised of amortization of the ROU asset and interest expense which are recognized in operating expenses and other income (expense), net.
Components of lease expense were as follows:
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|
|
| Three Months Ended March 31, |
|
| Three Months Ended March 31, |
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|
|
| Three Months Ended March 31, |
| |||||||
Lease Cost |
| Classification |
| 2020 |
|
| 2019 |
|
| Classification |
| 2021 |
|
| 2020 |
| ||||||
Operating lease cost |
| Operating expenses |
| $ | 530 |
|
| $ | 380 |
|
| Operating expenses |
| $ | 428 |
|
| $ | 413 |
| ||
Operating lease cost |
| Inventory |
|
| — |
|
|
| 1,248 |
|
| Inventory |
|
| 100 |
|
|
| 117 |
| ||
Total operating lease cost |
|
|
|
|
| $ | 530 |
|
| $ | 1,628 |
|
|
|
| $ | 528 |
|
| $ | 530 |
|
Finance lease cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets |
| Operating expenses |
|
| 14 |
|
|
| 9 |
|
| Operating expenses |
|
| 10 |
|
|
| 10 |
| ||
Amortization of right-of-use assets |
| Inventory |
|
| 12 |
|
|
| 4 |
| ||||||||||||
Interest on lease liabilities |
| Other income (expense), net |
|
| 2 |
|
|
| 1 |
|
| Other income (expense), net |
|
| 2 |
|
|
| 2 |
| ||
Total finance lease cost |
|
|
|
|
| $ | 16 |
|
| $ | 10 |
|
|
|
| $ | 24 |
|
| $ | 16 |
|
Variable lease cost |
| Inventory |
|
| — |
|
|
| 2,373 |
| ||||||||||||
Total lease cost |
|
|
|
|
| $ | 546 |
|
| $ | 4,011 |
|
|
|
| $ | 552 |
|
| $ | 546 |
|
Short-term lease expense for both the three months ended March 31, 20202021 and 20192020 was not material.
Supplemental cash flow information related to operating and finance leases for the three months ended March 31, 20202021 was as follows (in thousands):
|
| Three Months Ended March 31, |
|
| Three Months Ended March 31, |
|
| Three Months Ended March 31, |
| |||||||
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
| ||||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash outflows from operating leases |
| $ | 487 |
|
| $ | 1,462 |
|
| $ | 418 |
|
| $ | 487 |
|
Operating cash outflows from finance leases |
|
| 14 |
|
|
| 9 |
|
|
| 24 |
|
|
| 14 |
|
Right-of-use assets obtained in exchange for lease obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
| $ | 1,105 |
|
| $ | 23,046 |
|
| $ | — |
|
| $ | 1,105 |
|
Finance leases |
|
| 60 |
|
|
| 119 |
|
|
| — |
|
|
| 60 |
|
Supplemental balance sheet information as of March 31, 2020, related to operating and finance leases was as follows (in thousands, except lease term and discount rate):
|
| March 31, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
| ||||
Reported as: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets |
| $ | 8,234 |
|
| $ | 7,494 |
|
| $ | 6,765 |
|
| $ | 7,176 |
|
Finance lease right-of-use assets |
|
| 124 |
|
|
| 78 |
|
|
| 137 |
|
|
| 158 |
|
Total right-of use assets |
| $ | 8,358 |
|
| $ | 7,572 |
|
| $ | 6,902 |
|
| $ | 7,334 |
|
Accrued and other current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities |
| $ | 1,430 |
|
| $ | 1,259 |
|
| $ | 1,486 |
|
| $ | 1,504 |
|
Finance lease liabilities |
|
| 54 |
|
|
| 40 |
|
|
| 79 |
|
|
| 84 |
|
Warranty reserve and other long-term liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities |
|
| 7,005 |
|
|
| 6,434 |
|
|
| 5,578 |
|
|
| 5,946 |
|
Finance lease liabilities |
|
| 69 |
|
|
| 35 |
|
|
| 65 |
|
|
| 77 |
|
Total lease liabilities |
| $ | 8,558 |
|
| $ | 7,768 |
|
| $ | 7,208 |
|
| $ | 7,611 |
|
Weighted average remaining lease term (years) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
| 5 |
|
|
| 5 |
|
|
| 5 |
|
|
| 5 |
|
Finance leases |
|
| 3 |
|
|
| 2 |
|
|
| 2 |
|
|
| 2 |
|
Weighted average discount rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
| 7.70 | % |
|
| 7.45 | % |
|
| 7.78 | % |
|
| 7.75 | % |
Finance leases |
|
| 5.42 | % |
|
| 4.06 | % |
|
| 6.10 | % |
|
| 6.15 | % |
As of March 31, 2020,2021, maturities of the Company’s operating and finance lease liabilities are as follows (in thousands):
Period |
| Operating leases |
|
| Finance leases |
|
| Total |
|
| Operating leases |
|
| Finance leases |
|
| Total |
| ||||||
2020 |
| $ | 1,560 |
|
| $ | 45 |
|
| $ | 1,605 |
| ||||||||||||
2021 |
|
| 2,075 |
|
|
| 53 |
|
|
| 2,128 |
| ||||||||||||
Remainder of 2021 |
| $ | 1,570 |
|
| $ | 67 |
|
| $ | 1,637 |
| ||||||||||||
2022 |
|
| 1,893 |
|
|
| 17 |
|
|
| 1,910 |
|
|
| 1,920 |
|
|
| 55 |
|
|
| 1,975 |
|
2023 |
|
| 1,940 |
|
|
| 17 |
|
|
| 1,957 |
|
|
| 1,968 |
|
|
| 30 |
|
|
| 1,998 |
|
2024 and thereafter |
|
| 2,974 |
|
|
| 1 |
|
|
| 2,975 |
| ||||||||||||
2024 |
|
| 1,507 |
|
|
| 1 |
|
|
| 1,508 |
| ||||||||||||
2025 |
|
| 579 |
|
|
| — |
|
|
| 579 |
| ||||||||||||
2026 and thereafter |
|
| 955 |
|
|
| — |
|
|
| 955 |
| ||||||||||||
Total lease payments |
| $ | 10,442 |
|
| $ | 133 |
|
| $ | 10,575 |
|
| $ | 8,499 |
|
| $ | 153 |
|
| $ | 8,652 |
|
Less imputed interest |
|
| 2,007 |
|
|
| 10 |
|
|
| 2,017 |
|
|
| 1,435 |
|
|
| 9 |
|
|
| 1,444 |
|
Total operating lease liabilities |
| $ | 8,435 |
|
| $ | 123 |
|
| $ | 8,558 |
| ||||||||||||
Total lease liabilities |
| $ | 7,064 |
|
| $ | 144 |
|
| $ | 7,208 |
|
| Debt |
Term Loan and Revolving Loan
On July 25, 2017, the Company entered into a Term Loan Credit and Security Agreement or the Existing Termand a Revolving Loan Credit Agreement, and a Credit and Security Agreement, or the Existing Revolving Credit Agreement with MidCap Financial Trust (“MidCap”), which replaced the Company’s prior Silicon Valley Bank Loan Agreement, or the SVB Loan Agreement. On July 1, 2019 the Company entered into a Restated Term Loan Credit Agreement with MidCap Financial Trust as the agentBoth agreements were amended and lender, and additional lenders thereto from time to time, or the Restated Term Loan Agreement, which restated the Existing Term Loan Agreement. Also on July 1, 2019 and further amended on November 7, 2019 (as so amended, the Company entered into an Amended“Restated Term Loan Agreement” and Restated Credit and Security Agreement (Revolving Loan), by and among the Company, the lenders party thereto from time to time, and MidCap Financial Trust, or the Restated“Restated Revolving Credit AgreementAgreement” and, together, with the Restated Term Loan Agreement, the Credit Agreements, which restated the Existing Revolving Credit Agreement.“Credit Agreements”).
The Restated Term Loan Agreement provided for the following tranches: (i) a $35 million term loan facility drawn at signing, (ii) a $5 million term loan facility drawn at signing, (iii) at any time after September 30, 2020 to December 31, 2020, a $10.0 million term loan facility (subject to the satisfaction of certain conditions, including evidence that the Company’s Net Revenuenet revenue for the past 12 months was greater than or equal to $100.0 million), and (iv) until December 31, 2020 and upon the consent of Agentthe agent and the lenders following a request from the Company, an additional $15.0 million term loan facility, or altogether, the Restated Term Loan.facility. The Restated Term Loanloan matures on July 1, 2024 and carries an interest rate of LIBOR plus 7.50%. The Company will make monthly payments of accrued interest under the Restated Term Loan from the funding date of the Restated Term Loan, until July 31, 2021, to be followed by monthly installments of principal and interest through the Maturity Date of July 1, 2024.maturity date. The Company may prepay some or all of the Restated Term Loanprincipal prior to its maturity date provided the Company pays MidCap a prepayment fee. Net proceeds fromThe loan provided that the Restated Term Loan were usedCompany shall pay an exit fee equal to repay5.0% of the $35 million outstanding balance relatedaggregate amount of all term loans funded to the Term Loans. As of March 31,Company.
On May 11, 2020, there was $40.0 million outstanding related to the Restated Term Loans of which $25.0 million is presented in “Current portion of long-term debt” and $15 million is presented in “Long-term debt, net of current portion” on the condensed consolidated balance sheet as a result of the Company enteringentered into the Second Amendment to the Amended and Restated Credit and Security Agreement (Term Loan), by and among the Company, certain of the Company’s subsidiaries, the lenders party thereto and MidCap Financial Trust as agent (the “Term Amendment”). The Term Amendment provided for, among other things, the prepayment by the Company of $25.0 million of outstanding principal, $0.1 million of accrued interest, and $1.25 million in prepaid exit fees with the parties agreeing to waive the prepayment fee with respect to these amounts. The Term Amendment increased the tranche 3 commitment amount from $10.0 million to $15.0 million, extended the tranche 3 termination date from December 31, 2020 to June 30, 2021, and amended certain conditions upon which the tranche 3 commitment can be withdrawn, including evidence that the Company’s net revenue for the past six months was greater than or equal to $30.0 million. In addition, the Debt Restructuring. ReferTerm Amendment amended certain financial requirements including reducing the Company’s minimum unrestricted cash amount from $20.0 million to Note 16 – Subsequent Events for further detail$5.0 million and amended certain minimum net revenue requirements. Further, the monthly minimum net revenue requirements were revised to be calculated on a trailing three-month basis.
On February 5, 2021, the Company entered into a Second Amended and Restated Credit and Security Agreement (Term Loan), by and among the Company, certain of the Company’s subsidiaries, the lenders party thereto from time to time and MidCap Financial Trust, as administrative agent and collateral agent (“Agent”) (the “Restated Term Loan Agreement”). The Restated Term Loan Agreement amends and restates the Company’s existing Amended and Restated Credit and Security Agreement, dated as of July 1, 2019. Pursuant to the Restated Term Loan Agreement, tranche 3 commitments were reduced from $15 million to $1 million and were advanced on the Debt Restructuring. effective date of the Restated Term Loan Agreement and the remaining unfunded tranche of $15 million was revised to 2 $5 million tranche commitments, with tranche 4 availability commencing on July 1, 2021 and tranche 5 availability commencing July 1, 2022. The parties agreed to extend the last day of the interest only period for all tranches from July 31, 2021 in the Existing Term Loan Agreement to December 31, 2022 in the Restated Term Loan Agreement. The Restated Term Loan Agreement contains certain minimum net revenue requirements based on the Company’s 12-month trailing net revenue, as well as certain minimum unrestricted cash requirements that increase upon the funding of the tranche 4 and tranche 5 loans. The exit fee was modified to apply to only to the amount of any tranche 4 and 5 loans advanced. Finally, in connection with the Restated Term Loan Agreement, the Company agreed to pay an amendment fee of $750,000.
As of March 31, 2020,2021, there was $16.0 million of outstanding principal related to the term loans and $1.4 million of unamortized debt issuance costs on the Restated Term Loans was $1.6 million andwhich are included as a reduction to debt in “Long-term debt, net of current portion”debt” on the condensed consolidated balance sheet.sheets.
The Restated Revolving Credit Agreement provides for, among other things, a revolving loan of up to $10.0 million (the “Restated Revolving Loan”).million. The amount of loans available to be drawn under the Revolving Credit Agreement is based on a borrowing base equal to 85% of the net collectible value of eligible accounts receivable plus 40% of eligible finished goods inventory, or the Borrowing Base, provided that availability from eligible finished goods inventory does not exceed 20% of the Borrowing Base. The Restated Revolving Loanrevolving loan carries an interest rate of LIBOR plus 4.50%. The BorrowersCompany may make (subject to the applicable borrowing base at the time) and repay borrowings from time to time under the Restated Revolving Credit Agreement until the maturity of the facility on July 1, 2024. Immediately prior to the effectiveness of the Restated Revolving Credit Agreement, the Company converted the $4.3 million outstanding borrowings under the Revolving Loan into the Restated Revolving Loan. As of March 31, 2020, there were no borrowings outstanding under the Revolving Loan. As of March 31, 2020, the unamortized debt issuance costs related to the Revolving Loan was approximately $0.1 million and was included in “Other assets” on the condensed consolidated balance sheet.
On May 11, 2020, in association with the Debt Restructuring, the Company entered in tointo the Second Amendment to Amended and Restated Credit and Security Agreement (Revolving Loan), by and among the Company, certain of the Company’s subsidiaries, the lenders party thereto and MidCap Financial Trust as agent (the “Revolving Amendment”). ReferThe Revolving Amendment included conforming changes to Note 16 – Subsequent Events for further detailreflect the changes in the Term Amendment. In addition, the Revolving Amendment reduced the borrowing base by the portion of the eligible inventory previously included in the calculation.
Also on February 5, 2021, the Company entered into a Third Amendment to the Amended and Restated Credit and Security Agreement (Revolving Loan), by and among the Company, the lenders party thereto from time to time, and the Agent (the “Revolving Loan Amendment”). The Revolving Loan Amendment modified the net revenue requirement in a manner consistent with the modification under the Restated Term Loan Agreement. In addition, the Revolving Loan Amendment made other conforming changes to the Restated Term Loan Agreement.
As of March 31, 2021, there were 0 borrowings outstanding under the Revolving Loan. As of March 31, 2021, the unamortized debt issuance costs related to the revolving loan was approximately $0.1 million and was included in “Other assets” on the Debt Restructuring.condensed consolidated balance sheets.
The amortization of debt issuance costs on the Restated Term Loansterm loan and the Restated Revolving Loanrevolving loan for the three months ended March 31, 2021 and 2020 were $0.2 million and 2019 were $0.1 million, respectively, and was included in interest expense in the condensed consolidated statements of operations.
The Credit Agreements include customary affirmative and restrictive covenants and representations and warranties, including a financial covenant for minimum revenues, a financial covenant for minimum cash requirements, a covenant against the occurrence of a “change in control,” financial reporting obligations, and certain limitations on indebtedness, liens, investments, distributions, collateral, mergers or acquisitions, taxes, and deposit accounts. Upon the occurrence of an event of default, a default interest rate of an additional 5.0% may be applied to any outstanding principal balances, and MidCap may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Credit Agreements. The Company’s obligations under the Credit Agreements are secured by a security interest in substantially all of the Company’s assets. In association with the Debt Restructuring on May 11, 2020, certain covenants in the Credit Agreements were amended. Refer to Note 16 – Subsequent Events for further detail on the Debt Restructuring.
On March 11, 2020, the Company issued $60.0 million of unsecured and subordinated convertible notes with an interest rate of 4.00% (“Note”) to Deerfield Partners, L.P. (“Holder”) in order to fund ongoing operations. The Note matures on March 11, 2025, subject to earlier conversion by the option of the Holder at any time in whole or in part into common shares of the Company, for a period up to five years. Upon conversion by the Holder, the Company shall deliver, shares of the Company’s common stock at a conversion rate of 14,634 per $1,000 principal amount of the Note (which represents an initial conversion rate price of $4.10), or the Base Conversion Rate, in each case subject to customary anti-dilution adjustments. In addition to the typical anti-dilution adjustment, the Note also provides the Holder with additional consideration (“Make-Whole Provision”) beyond the settlement of the conversion obligation, in the event of a major transaction prior to maturity (e.g. a change in control). Upon conversion by the Holder in the event of a major transaction, the Company shall deliver, either cash, shares of the Company’s common stock or a combination of cash and common stock at the Base Conversion rate plus the additional consideration from the Make-Whole Provision. The $60.0 million principal amount of the Note is not payable until the maturity date of March 11, 2025, unless converted to equity earlier. TheBeginning on July 1, 2020, the Company will paypays quarterly interest in cash on the Note at 4.00% per annum, quarterly from July 1, 2020.annum.
The conversion features in the outstanding convertible debt instrument are accounted for as a free-standing embedded derivative bifurcated from the principal balance of the Note, as (1) the conversion features are not clearly and closely related to the debt instrument and are not considered to be indexed to the Company’s equity, (2) the conversion features standing alone meet the definition of a derivative, and (3) the Note is not remeasured at fair value each reporting period with changes in fair value recorded in the condensed consolidated statement of operations.
The initial embedded derivative liability of $16.1 million was recorded as a non-current liability on the condensed consolidated balance sheet and is remeasured to fair value at each balance sheet date with a resulting non-cash gain or loss related to the change in the fair value being charged to earnings (loss). As of March 31, 2020,2021, the fair value of the derivative liability was $16.2$69.3 million. A corresponding debt discount to the initial embedded derivative liability of $16.1 million and issuance costs of $1.5 million were recorded on the issuance date and is netted against the principal amount of the Note. As of March 31, 2020, 2021, the unamortized debt discount and issuance costs were $17.5$14.9 million. The Company will amortize the debt discount and debt issuance costs to interest expense under the effective interest method over the term of the Note, at a resulting effective interest rate of approximately 12%. For the quarterthree months ended March 31, 2021 and 2020, the amortization of the convertible debt discount and issuance costs were $0.7 million and $0.2 million, respectively, and were included in interest expense in the condensed consolidated statements of operations.
CARES Act
On April 20, 2020, the Company was granted a loan of $6.7 million under the Paycheck Protection Program of the CARES Act, or the PPP Loan, from Silicon Valley Bank, or the Lender. The accruedPPP Loan matures on April 20, 2022, or the Maturity Date, and bears interest at a rate of 1.0% per annum. Under the terms of the PPP Loan, the Company will make no payments until the date which forgiveness of the PPP Loan is determined, which can be up to 10 months following the end of the covered period (which is defined as 24 weeks from the date of the loan), or the Deferral Period. Commencing one month after the expiration of the Deferral Period, and continuing on the same day of each month until the Maturity Date, the Company will pay to Lender monthly payments of principal and interest, in an amount required to fully amortize the principal amount outstanding on the PPP Loan on the last day of the Deferral Period by the Maturity Date. As of March 31, 2021, $5.8 million is recorded in “Current portion of long-term debt” and $0.8 million is recorded in “Long-term debt” on the Company’s condensed consolidated balance sheets.
All or a portion of the PPP Loan may be forgiven upon submission of documentation of expenditures in accordance with certain specified requirements. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities during the 24-week period beginning on the date of loan approval. Not more than 40% of the forgiven amount may be for non-payroll costs. The amount of the PPP Loan eligible to be forgiven will be reduced if the Company’s full-time headcount declines, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25%. The Company will be required to repay any portion of the outstanding principal amountthat is not forgiven, along with accrued interest, in accordance with the amortization schedule described above. The Company has elected to account for the PPP loan in accordance with ASC 470 – Debt, and any forgiveness of $60 millionthe loan will be treated as of March 31, 2020 was $0.1 million and was included in “Accrued and other current liabilities” ina gain on extinguishment within the condensed consolidated balance sheet.statement of operations.
Future Principal Payments of Debt
The future schedule of principal payments for all outstanding debt as of March 31, 20202021 was as follows (in thousands):
Fiscal Year |
|
|
|
|
|
|
|
|
Remainder of 2020 |
| $ | 25,000 |
| ||||
2021 |
|
| 2,083 |
| ||||
Remainder of 2021 |
| $ | 3,326 |
| ||||
2022 |
|
| 5,000 |
|
|
| 3,326 |
|
2023 |
|
| 5,000 |
|
|
| 10,105 |
|
2024 |
|
| 2,917 |
|
|
| 5,895 |
|
Thereafter |
|
| 60,000 |
| ||||
2025 |
|
| 60,000 |
| ||||
Total |
| $ | 100,000 |
|
| $ | 82,652 |
|
| a. | Authorized Stock |
The Company’s Amended and Restated Certificate of Incorporation authorizes the Company to issue 210,000,000 shares of common and preferred stock, consisting of 200,000,000 shares of common stock with $0.01 par value and 10,000,000 shares of preferred stock with $0.01 par value. As of March 31, 20202021 and December 31, 2019,2020, the Company had no0 preferred stock issued or outstanding.
| b. | Common Stock Warrants |
On January 17, 2013, the Company entered into a Loan and Security Agreement, or the Original Term Loan Agreement, with Oxford Finance, LLC, or Oxford. On June 30, 2014, the Company entered into an Amended and Restated Loan and Security Agreement, or the Amended Term Loan Agreement, with Oxford. In connection with the Original Term Loan Agreement and the Amended Term Loan Agreement, the Company issued to Oxford (i) seven-year warrants in January 2013 to purchase shares of the Company’s common stock with a value equal to 3.0% of the tranche A, B and C term loans amounts, or the Original Warrants, and (ii) seven-year warrants in June 2014 to purchase shares of the Company’s common stock with a value equal to 2.5% of the tranche D term loan amount. The warrants have an exercise price per share of $14.671. The warrants within Tranche A expired on January 17, 2020, the warrants within Tranche B expired on August 1, 2020, and the warrants within Tranche C expired on December 13, 2020. As of March 31, 2020,2021, there were warrants within Tranche D to purchase an aggregate of 32,37517,040 shares of common stock outstanding.
| c. | Stock Option Plans |
In April 2007, the Company adopted the 2007 Equity Incentive Plan, or the 2007 Plan. The 2007 Plan provides for the granting of stock options to employees, directors and consultants of the Company. Options granted under the 2007 Plan may either be incentive stock options or nonstatutory stock options. Incentive stock options, or ISOs, may be granted only to Company employees. Nonstatutory stock options, or NSOs, may be granted to all eligible recipients. A total of 1,690,448 shares of the Company’s common stock were initially reserved for issuance under the 2007 Plan.
The Company’s board of directors adopted the 2014 Equity Incentive Plan, or 2014 Plan, in July 2014, and the stockholders approved the 2014 Plan in October 2014. The 2014 Plan became effective upon completion of the IPO on November 3, 2014, at which time the Company ceased granting awards under the 2007 Plan. Under the 2014 Plan, the Company may issue ISOs, NSOs, stock appreciation rights, restricted stock awards, restricted stock unit awards and other forms of stock awards, or collectively, stock awards, all of which may be granted to employees, including officers, non-employee directors and consultants of the Company and their affiliates. ISOs may be granted only to employees. A total of 1,027,500 shares of common stock were initially reserved for issuance under the 2014 Plan, subject to certain annual increases. As of March 31, 2020,2021, a total of 2,347,6641,738,359 shares of the Company’s common stock were available for issuance under the 2014 Plan.
Pursuant to a board-approved Inducement Plan, the Company may issue NSOs and restricted stock unit awards, or collectively, stock awards, all of which may only be granted to new employees of the Company and their affiliates in accordance with NASDAQ Stock Market Rule 5635(c)(4) as an inducement material to such individuals entering into employment with the Company. As of March 31, 2020,2021, inducement grants for 1,412,0831,667,910 shares of common stock have been awarded, and 749,276796,304 shares of common stock were available for future issuance under the Inducement Plan.
Options under the 2007 Plan and the 2014 Plan may be granted for periods of up to ten years as determined by the Company’s board of directors, provided, however, that (i) the exercise price of an ISO shall not be less than 100% of the estimated fair value of the shares on the date of grant, and (ii) the exercise price of an ISO granted to a more than 10% shareholder shall not be less than 110% of the estimated fair value of the shares on the date of grant. An NSO has no such exercise price limitations. NSOs under the Inducement Plan may be granted for periods of up to ten years as determined by the board of directors, provided, the exercise price will not be less than 100% of the estimated fair value of the shares on the date of grant. Options generally vest with 25% of the grant vesting on the
first anniversary and the balance vesting monthly on a straight-lined basis over the requisite service period of three additional years for the award. Additionally, options have been granted to certain key executives that vest upon achievement of performance conditions based on performance targets as defined by the board of directors, which have included net sales targets and defined corporate objectives over the performance period with possible payout ranging from 0% to 100% of the target award. Compensation expense is recognized on a straight-lined basis over the vesting term of one year based upon the probable performance target that will be met. The vesting provisions of individual options may vary but provide for vesting of at least 25% per year.
The following summarizes all option activity under the 2007 Plan, 2014 Plan and Inducement Plan:
|
|
|
|
|
| Weighted |
|
| Weighted average |
| ||
|
|
|
|
|
| average |
|
| remaining |
| ||
|
| Option |
|
| exercise |
|
| contractual |
| |||
|
| Shares |
|
| price |
|
| term (year) |
| |||
Balances at December 31, 2019 |
|
| 1,880,846 |
|
| $ | 7.42 |
|
|
| 5.48 |
|
Forfeited |
|
| (300,000 | ) |
|
| 7.93 |
|
|
|
|
|
Balances at March 31, 2020 |
|
| 1,580,846 |
|
| $ | 7.33 |
|
|
| 4.97 |
|
|
|
|
|
|
| Weighted |
|
| Weighted average |
| ||
|
|
|
|
|
| average |
|
| remaining |
| ||
|
| Option |
|
| exercise |
|
| contractual |
| |||
|
| Shares |
|
| price |
|
| term (year) |
| |||
Balances at December 31, 2020 |
|
| 1,959,501 |
|
| $ | 4.79 |
|
|
| 5.92 |
|
Exercised |
|
| (12,727 | ) |
|
| 3.99 |
|
|
|
|
|
Forfeited |
|
| (91,327 | ) |
|
| 9.90 |
|
|
|
|
|
Balances at March 31, 2021 |
|
| 1,855,447 |
|
| $ | 4.54 |
|
|
| 5.87 |
|
For stock-based awards the Company recognizes compensation expense based on the grant date fair value using the Black-Scholes option valuation model. Stock-based compensation expense related to stock options for the three months ended March 31, 2021 was $0.1 million. There was no0 stock-based compensation expense related to stock options for the three months ended March 31, 2020. Stock-based compensation expense related to stock options was $0.2 million for the three months ended March 31, 2019. As of March 31, 2020, there were also no2021, unrecognized compensation costs related to stock options.options was $1.9 million.
| d. | Restricted Stock Units |
The Company has issued restricted stock unit awards, or RSUs, under the 2014 Plan and the Inducement Plan. The RSUs issued to employees generally vest on a straight-line basis annually over a 3-year requisite service period. RSUs issued to non-employees generally vest either monthly or annually over the service term. In 2020, the Company implemented a sell-to-cover program for employees who elect to sell shares to cover any withholding taxes due upon vesting. For employees who do not elect to sell shares to cover withholding taxes, the Company nets shares upon vesting and pays the withholding taxes directly.
Activity related to RSUs is set forth below:
|
|
|
|
|
| Weighted average |
|
|
|
|
|
| Weighted average |
| ||
|
| Number |
|
| grant date |
|
| Number |
|
| grant date |
| ||||
|
| of shares |
|
| fair value |
|
| of shares |
|
| fair value |
| ||||
Balances at December 31, 2019 |
|
| 2,232,956 |
|
| $ | 11.99 |
| ||||||||
Balances at December 31, 2020 |
|
| 3,093,790 |
|
| $ | 6.97 |
| ||||||||
Granted |
|
| 768,663 |
|
|
| 5.88 |
|
|
| 1,199,518 |
|
|
| 7.39 |
|
Vested |
|
| (472,914 | ) |
|
| 8.42 |
|
|
| (554,896 | ) |
|
| 6.38 |
|
Forfeited |
|
| (291,222 | ) |
|
| 3.50 |
|
|
| (176,337 | ) |
|
| 4.34 |
|
Balances at March 31, 2020 |
|
| 2,237,483 |
|
| $ | 11.75 |
| ||||||||
Balances at March 31, 2021 |
|
| 3,562,075 |
|
| $ | 7.33 |
|
Stock-based compensation expense for RSUs for the three months ended March 31, 2021 and 2020 and 2019 was $1.9$2.9 million and $3.4$1.9 million, respectively. As of March 31, 2020,2021, there was $12.2$15.6 million of total unrecognized compensation costs related to non-vested RSU awards. The cost is expected to be recognized over a weighted average period of approximately 1.702.23 years.
| e. | Employee Stock Purchase Plan |
The Company’s board of directors adopted the 2014 Employee Stock Purchase Plan, or ESPP, in July 2014, and the stockholders approved the ESPP in October 2014. The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. The ESPP provides for offering periods not to exceed 27 months, and each offering period will include purchase periods, which will be the approximately six-month period commencing with one exercise date and ending with the next exercise date. Employees are able to purchase shares at 85% of the lower of
the fair market value of the Company’s common stock on the first trading day of the offering period or on the purchase date. A total of 255,500 shares of common stock were initially reserved for issuance under the ESPP, subject to certain annual increases.
During the three months ended March 31, 2020,2021, employees purchased 113,61595,919 shares of common stock at a weighted average price of $4.70$3.37 per share. As of March 31, 2020,2021, the number of shares of common stock available for future issuance was 1,036,405.1,356,767.
The Company estimated the fair value of employee stock purchase rights using the Black-Scholes model. Stock-based compensation expense related to the ESPP was $0.1 million and $0.2 million for both the three months ended March 31, 20202021 and 2019, respectively.2020.
| f. | Significant Modifications |
During the three months ended March 31, 2021 and 2020, there were no0 material modifications of equity awards. During
8. | Net Loss Per Share |
Basic net loss per share attributable to common stockholders is computed by dividing net loss by the weighted average number of common shares outstanding during each period. Diluted net loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares and dilutive potential common share equivalents then outstanding, to the extent they are dilutive. Potential common shares consist of shares issuable upon the exercise of stock options and warrants (using the treasury stock method). Dilutive net loss per share is the same as basic net loss per share for all periods presented because the effects of potentially dilutive items were anti-dilutive.
|
| Three Months Ended March 31, |
| |||||
|
| 2021 |
| 2020 |
| |||
Net loss (in thousands) |
| $ | (54,690 | ) |
| $ | (28,612 | ) |
Weighted average common shares outstanding, basic and diluted |
|
| 54,321,146 |
|
|
| 49,916,412 |
|
Net loss per share attributable to common stockholders |
| $ | (1.01 | ) |
| $ | (0.57 | ) |
The Company excluded the following potentially dilutive securities, outstanding as of March 31, 2021 and 2020, from the computation of diluted net loss per share attributable to common stockholders for the three months ended March 31, 2019,2021 and 2020 because they had an anti-dilutive impact due to the net loss attributable to common stockholders incurred for the periods.
|
| March 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Stock options to purchase common stock |
|
| 2,455,504 |
|
|
| 1,590,903 |
|
Warrants for the purchase of common stock |
|
| 17,040 |
|
|
| 32,375 |
|
Equity contingent consideration |
|
| 607,442 |
|
|
| 607,442 |
|
Stock issuable upon conversion of convertible note |
|
| 16,175,862 |
|
|
| 19,733,352 |
|
|
|
| 19,255,848 |
|
|
| 21,964,072 |
|
The Company recognized $0.4 million in incremental compensation cost resulting from entering into a consulting agreement with one former employee that resulteduses the if-converted method for calculating any potential dilutive effects of the convertible note. The Company did not adjust the net loss for the three months ended March 31, 2021 to eliminate any interest expense or gain/loss for the derivative liability related to the note in the modificationcomputation of their existing equity awards.diluted loss per share, as the effects would be anti-dilutive.
| Income Taxes |
The Company operates in several tax jurisdictions and is subject to taxes in each jurisdiction in which it conducts business. To date, the Company has incurred cumulative net losses and maintains a full valuation allowance on its net deferred tax assets due to the uncertainty surrounding realization of such assets. The Company had no0 tax expense for both the three months ended March 31, 20202021 and 2019.2020.
| Segment Information |
Reportable Segments
The Company has two2 reportable segments: Breast Products and miraDry. The Breast Products segment focuses on sales of silicone gel breast implants, tissue expanders and scar management products under the brands OPUS, Luxe, Curve, AlloX2, Dermaspan, Softspan and BIOCORNEUM. The miraDry segment, acquired on July 25, 2017, focuses on sales of the miraDry System, consisting of a console and a handheld device which uses consumable single-use bioTips. These segments align with the Company’s principal target markets. miraDry has been included in the condensed consolidated results of operations as of the acquisition date and financial performance of the acquired business is reported in the miraDry segment. The Vesta Acquisition, completed on November 7, 2019, has been included in the condensed consolidated results of operations as of the acquisition date and financial performance of the acquired business is reported in the Breast Products segment.
The Company’s Chief Operating Decision Maker, or CODM, assesses the performance of each segment and allocates resources to those segments based on net sales and operating income (loss). Operating income (loss) by segment includes items that are directly attributable to each segment, including sales and marketing functions, as well as finance, information technology, human resources, legal and related corporate infrastructure costs, along with certain benefit-related expenses. There are no0 unallocated expenses for the two segments.
The following tables present the net sales, net operating loss and net assets by reportable segment for the periods presented (in thousands):
|
| Three Months Ended |
|
| |||||||||||||
|
| March 31, |
|
| March 31, |
|
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
|
| ||||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Breast Products |
| $ | 12,471 |
|
| $ | 9,751 |
|
| $ | 18,312 |
|
| $ | 12,471 |
|
|
miraDry |
|
| 4,461 |
|
|
| 7,801 |
|
|
| 4,924 |
|
|
| 4,461 |
|
|
Total net sales |
| $ | 16,932 |
|
| $ | 17,552 |
|
| $ | 23,236 |
|
| $ | 16,932 |
|
|
|
| March 31, |
|
| Three Months Ended |
|
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| March 31, |
|
| |||||||
Loss from operations |
|
|
|
|
|
|
|
| |||||||||
|
| 2021 |
|
| 2020 |
|
| ||||||||||
Profit (Loss) from operations |
|
|
|
|
|
|
|
|
| ||||||||
Breast Products |
| $ | (12,363 | ) |
| $ | (14,032 | ) |
| $ | (11,550 | ) |
| $ | (12,363 | ) |
|
miraDry |
|
| (14,643 | ) |
|
| (11,819 | ) |
|
| 1,730 |
|
|
| (14,643 | ) |
|
Total loss from operations |
| $ | (27,006 | ) |
| $ | (25,851 | ) |
| $ | (9,820 | ) |
| $ | (27,006 | ) |
|
|
| March 31, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Breast Products |
| $ | 196,172 |
|
| $ | 169,613 |
|
| $ | 180,691 |
|
| $ | 151,059 |
|
miraDry |
|
| 26,674 |
|
|
| 34,791 |
|
|
| 17,722 |
|
|
| 17,919 |
|
Total assets |
| $ | 222,846 |
|
| $ | 204,404 |
|
| $ | 198,413 |
|
| $ | 168,978 |
|
| Commitments and Contingencies |
The Company is subject to claims and assessment from time to time in the ordinary course of business. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.
Product Liability Litigation
On October 7, 2019, a lawsuit was filed in the Superior Court of the State of California against the Company and Silimed Industria de Implantes Ltda. (the Company’s former contract manufacturer). The lawsuit alleges that the Company’s textured breast implants caused certain of the plaintiffs to develop a condition known as breast implant associated anaplastic large cell lymphoma (“BIA-ALCL”), and that the Company is liable to the plaintiffs based on claims for strict liability (failure to warn), strict liability (defective manufacture), negligence and loss of consortium. On January 21, 2020, the Company filed a demurrer to the plaintiff’s complaint, which demurrer is still pending before the Court.Court granted in a tentative ruling dated March 9, 2021 with leave to replead. The Plaintiffs filed an amended complaint on April 6, 2021 and the Company filed a demurrer to that complaint on May 6, 2021. The Company intends to vigorously defend itself in this lawsuit. Given the nature of this case, the Company is unable to estimate the reasonably possible loss or range of loss, if any, arising from this matter.
On September 23, 2020, a lawsuit was filed in the Eastern District of Tennessee against the Company. The lawsuit alleges that the Company’s textured breast implants caused certain of the plaintiffs to develop a condition known as breast implant associated anaplastic large cell lymphoma (“BIA-ALCL”), and that the Company is liable to the plaintiffs based on claims for negligence, strict liability (manufacturing defects), strict liability (failure to warn), breach of express and implied warranties, and punitive damages. The Company filed a motion to dismiss the complaint on December 7, 2020. Briefing on the motion is complete and oral argument is presently scheduled for July 2021. The Company intends to vigorously defend itself in this lawsuit. Given the nature of this case, the Company is unable to estimate the reasonably possible loss or range of loss, if any, arising from this matter.
| Subsequent Events |
CARES Act
Sale of the miraDry Business
On April 20, 2020,May 11, 2021, the Company was grantedand certain of its subsidiaries entered into an Asset Purchase Agreement (the “Purchase Agreement”) with miraDry Acquisition Company, Inc., a loanDelaware corporation (“Buyer”), and, solely for purposes of $6.7 million under the Paycheck Protection ProgramSection 8.14 of the CARES Act, orPurchase Agreement, 1315 Capital II, LP, pursuant to which Buyer has agreed to acquire certain assets and rights, and assume certain liabilities, comprising the PPP Loan, from Silicon Valley Bank, or the Lender. Company’s miraDry business (the “Business”) for a purchase price of $10,000,000 in cash, subject to certain adjustments (the “Asset Purchase”).
The PPP Loan matures on April 20, 2022, or the Maturity Date,Purchase Agreement includes customary representations and bears interest at a rate of 1.0% per annum. Under the terms of the PPP Loan,warranties, as well as certain covenants, including, among other things, that: (i) the Company will make no payments during the six month period beginning on the date of the loan, or the Deferral Period. Commencing one month after the expiration of the Deferral Period,abide by certain non-solicitation, exclusivity, and continuing on the same day of each month thereafter until the Maturity Date,non-competition covenants, and (ii) the Company will payenter into a transition services agreement to Lender monthly paymentsprovide certain transition services related to the Business. The Asset Purchase is anticipated to close in the second quarter of principal and interest, each in such equal amount required to fully amortize the principal amount outstanding on the PPP Loan on the last day of the Deferral Period by the Maturity Date.
All or a portion of the PPP Loan may be forgiven upon application by the Company beginning 60 days, but not later than 120 days, after loan approval and upon documentation of expenditures in accordance with certain specified requirements. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities during the eight week period beginning on the date of loan approval. Not more than 25% of the forgiven amount may be for non-payroll costs. The amount of the PPP Loan eligible to be forgiven will be reduced if the Company’s full-time headcount declines, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25%.2021. The Company will be required to repay any portionreport the results of the outstanding principal that is not forgiven, along with accrued interest,miraDry business as discontinued operations beginning in accordance with the amortization schedule described above.
Debt Restructuring
On May 11, 2020, the Company entered in to the Second Amendment to Amended and Restated Credit and Security Agreement (Term Loan) (the “Term Agreement”), by and among the Company, certainsecond quarter of the Company’s subsidiaries, the lenders party thereto and MidCap Financial Trust as agent (the “Term Amendment”). The Term Amendment provides for, among other things, the prepayment by the Company of approximately $25.0 million of outstanding principal plus accrued interest, with the parties agreeing to waive the prepayment fee with respect to this amount. In connection with the prepayment, the Term Amendment requires the Company to prepay $1.25 million of the exit fee under the Term Agreement. The Term Amendment increases the tranche 3 commitment amount from $10.0 million to $15.0 million, extends the tranche 3 termination date from December 31, 2020 to June 30, 2021 and amends certain conditions upon which the tranche 3 commitment can be withdrawn, including evidence that the Company’s Net Revenue for the past six months was greater than or equalexpects to $30.0 million. In addition, the Term Amendment amends certain financial requirements including reducing the Company’s minimum unrestricted cash amount from $20.0 million to $5.0recognize a loss between $2.5 million and amends certain minimum net revenue requirements. Further, the monthly minimum net revenue requirements were revised to be calculated on a trailing three month basis. On May 11, 2020, the Company prepaid $25.0$3.5 million of principal, $1.25 million of the exit fee, and $0.1 million of accrued interest.
In addition, on May 11, 2020, the Company entered in to the Second Amendment to Amended and Restated Credit and Security Agreement (Revolving Loan), by and among the Company, certain of the Company’s subsidiaries, the lenders party thereto and MidCap Financial Trust as agent (the “Revolving Amendment”). The Revolving Amendment includes conforming changes to reflect the changes in the Term Amendment. In addition, the Revolving Amendment reduces the borrowing base by the portion of the eligible inventory previously included in the calculation.
same period.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 20192020 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations are contained in our Annual Report on Form 10-K for the year ended December 31, 2019,2020, filed with the Securities and Exchange Commission on March 16, 2020,11, 2021, or the Annual Report. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Sientra,” “the Company,” “we,” “us” and “our” refer to Sientra, Inc.
Forward-Looking Statements
The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in our other filings with the SEC. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements.
Overview
We are a medical aesthetics company committed to making a difference in patients’ lives by enhancing their body image, growing their self‑esteemuniquely centered on becoming the leader of transformative treatments and restoring their confidence.technologies focused on progressing the art of plastic surgery. We were founded to provide greater choices to board‑certifiedboard-certified plastic surgeons and patients in need of medical aesthetics products. We have developed a broad portfolio of products with technologically differentiated characteristics, supported by independent laboratory testing and strong clinical trial outcomes. We sell our breast implants in the U.S. for augmentation procedures exclusively to board‑certifiedboard-certified and board‑admissibleboard-admissible plastic surgeons and tailor our customer service offerings to their specific needs, which we believe helps secure their loyalty and confidence. In 2020, we also began to sell our breast implants in Japan through a distributor partner. We sell our breast tissue expanders for reconstruction procedures predominantly to hospitals and surgery centers, and our BIOCORNEUM scar management products to plastic surgeons, dermatologists and other specialties.
On June 11, 2017, we entered into a Merger Agreement with miraDry (formerly Miramar Labs) pursuant to which we commenced a tender offer to purchase all of the outstanding shares of miraDry’s common stock. Pursuant to the transaction, which closed on July 25, 2017 we added the miraDry System, the only FDA-cleared device to reduce underarm sweat, odor and hair of all colors to our aesthetics portfolio. Following our acquisition of miraDry in July 2017, we began selling the miraDry System, consisting of a console and a handheld device, and consumable single-use bioTips. As a result of the miraDry acquisition, weWe determined that we currently conduct our business in two operating segments: Breast Products and miraDry. The Breast Products segment focuses on sales of our breast implants, tissue expanders and scar management products under the brands Sientra, AlloX2, Dermaspan, Softspan and BIOCORNEUM.products. The miraDry segment focuses on sales of bioTips. See the “Recent Developments – Sale of the miraDry System, and bioTips.Business” section below.
We currently sell both our Breast Products and miraDry products in the U.S. through a direct sales organization, which as of March 31, 2020,2021, consisted of 9366 employees, including 78 sales representatives and 158 sales managers. Additionally, we also sell our miraDry Systemproducts in several international markets where we leverage a combination of distributor relationships and direct sales efforts. As of March 31, 2020, our international operations were supported by 72 sales representatives and 3 sales managers,a number of consultants.
Recent developments
Sale of the miraDry Business
On May 11, 2021, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with miraDry Acquisition Company, Inc., a Delaware corporation (“Buyer”), and, solely for purposes of Section 8.14 of the Purchase Agreement, 1315 Capital II, LP, pursuant to which Buyer has agreed to acquire certain assets and rights, and assume certain liabilities, comprising our miraDry business (the “Business”) for a purchase price of $10,000,000 in cash, subject to certain adjustments (the “Asset Purchase”).
The Purchase Agreement includes customary representations and warranties, as well as certain covenants, including, among other things, that: (i) we will abide by certain non-solicitation, exclusivity, and non-competition covenants, and (ii) we will enter into a numbertransition services agreement to provide certain transition services related to the Business. The Asset Purchase is anticipated to close in the second quarter of consultants supporting both direct2021. We will report the results of the miraDry business as discontinued operations beginning in the second quarter of 2021 and expect to recognize a loss between $2.5 million and $3.5 million in the same period.
Prior to entering into the Purchase Agreement, in April 2020, in part as a result of the impact of COVID-19, we re-focused our miraDry business to drive bioTip utilization to our existing installed base. On December 31, 2020, we eliminated our separate miraDry U.S. salesforce and transitioned miraDry sales efforts and distributor relationships.
Recent developmentsresponsibility into the Breast Products Business Development team.
COVID-19 Pandemic
On March 11, 2020,The rapid, global spread of COVID-19 has resulted in significant economic uncertainty, significant declines in business and consumer confidence and global demand in the World Health Organization declared the outbreak of a novel strain of coronavirus, also known as COVID-19,non-essential healthcare industry (among others), a global pandemic. Dueeconomic slowdown, and could lead to the pandemic, there has been uncertainty and disruption in thea global economy and significant volatility of financial markets.recession. We are subject to risks and uncertainties as a result of the COVID-19 pandemic. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, and employee-related amounts, will depend on future developments that are highly uncertain. We continue to monitor and assess new information related to the COVID-19 pandemic, the actions taken to contain or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets.
As an aesthetics company, surgical procedures involving our breast and miraDry products are susceptible to local and national government restrictions, such as social distancing, “shelter in place” orders and business closures, due to the economic and logistical impacts these measures have on consumer demand as well as the practitioners’ ability to administer such procedures. The inability or limited ability to perform such non-emergency procedures hassignificantly harmed our revenues forsince the period endingsecond quarter of 2020 and continued to harm our revenues during the three months ended March 31, 2020 and2021. While some states have lifted certain restrictions on non-emergency procedures, we will likely result incontinue to experience future harm to our revenues while theseexisting or new restrictions remain in place. It is not possible to accurately predict the length or severity of the COVID-19 pandemic or the timing for a broad and sustained ability to perform non-emergency procedures involving the Company’s products.
Further, the spread of COVID-19 has caused us to modify our workforce practices, and we may take further actions that we determine are in the best interests of our employees or as required by governments. In addition, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that this can lead to a local and/or global economic recession, which may result in further harm to the aesthetics market. Such economic disruption could adversely affect our business. The continued spread of COVID-19, or another infectious disease, could also result in delays or disruptions in our supply chain or adversely affect our manufacturing facilities and personnel. Further, trade and/or national security protection policies may be adjusted as a result of the COVID-19 pandemic, such as actions by governments that limit, restrict or prevent the movement of certain goods into a country and/or region, and current U.S./China trade relations may be further exacerbated by the pandemic.
The estimates used for, but not limited to, determining the collectability of accounts receivable, fair value of long-lived assets and goodwill, and sales returns liability required could be impacted by the pandemic. While the full impact of COVID-19 is unknown at this time, we have made appropriate estimates based on the facts and circumstances available as of the reporting date. These estimates may change as new events occur and additional information is obtained. See additional information below regarding the allowance for credit losses for accounts receivable.
Change in miraDry business strategy
In April 2020, in part as a result of the impact of COVID-19, we re-focused our miraDry business to drive high margin, bioTip utilization to our existing installed base. We expect that the net sales we generate from our bioTips will represent high margin sales (on a gross margin basis) and account for a substantial amount of our net sales for the next several years, with high margin consumables comprising a sizable percentage of our miraDry segment’s net sales.
Restructuring
On November 7, 2019, we announced an organizational efficiency initiative, or the Plan, designed to reduce spending and simplify operations. Under the Plan, we will implement numerous initiatives to reduce spending, including closing the Santa Clara offices of miraDry, Inc. and consolidating a number of business support services via a shared services organization at our Santa Barbara headquarters.
Under the Plan, we intend to reduce our workforce by terminating approximately 70 employees. As a result, we expect to incur total charges of approximately $4.1 million in connection with one-time employee termination costs, retention costs and other benefits. In addition, we expect to incur estimated charges of approximately $0.7 million related to contract termination costs, duplicate operating costs, and other associated costs. In total, the Plan is estimated to cost approximately $4.8 million, excluding non-cash charges, with related cash payments expected to be substantially paid out with cash on hand by the end of 2020.
The following table details the amount of the liabilities related to the Plan included in "Accrued and other current liabilities" in the condensed consolidated balance sheet as of March 31, 2020 (amounts in thousands):
|
| Severance costs |
|
| Other associated costs |
| ||
Balance at December 31, 2019 |
| $ | 894 |
|
| $ | - |
|
Costs charged to expense |
|
| 1,642 |
|
|
| 97 |
|
Costs paid or otherwise settled |
|
| (632 | ) |
|
| (97 | ) |
Balance at March 31, 2020 |
| $ | 1,904 |
|
| $ | — |
|
During the three months ended March 31, 2020, we recorded $1.7 million of severance and other associated costs related to the Plan. The following table details the charges by reportable segment, recorded in "Restructuring" under operating expenses in the condensed consolidated statements of operations for the three months ended March 31, 2020 by segment (amounts in thousands):
|
| Year Ended |
|
| Three Months |
|
| Cumulative Restructuring |
| |||
|
| December 31, 2019 |
|
| Ended March 31, 2020 |
|
| Charges |
| |||
Breast Products |
| $ | 499 |
|
| $ | 828 |
|
| $ | 1,327 |
|
miraDry |
|
| 584 |
|
|
| 911 |
|
|
| 1,495 |
|
Total |
| $ | 1,083 |
|
| $ | 1,739 |
|
| $ | 2,822 |
|
We have incurred cumulative restructuring charges of $2.8 million since the commencement of the restructuring plan through March 31, 2020. It is anticipated that we will additionally incur approximately $2.0 million of total restructuring costs during 2020, of which $0.1 million would be attributable to the Breast Products segment and $1.9 million would be attributable to the miraDry segment. We expect to realize cost savings of approximately $10.0 million in 2020 and approximately $5.0 million in 2021. All of the 2020 cost savings are expected to be realized in operating expenses, and the 2021 cost savings are expected to be realized approximately 20% in operating expenses and 80% in cost of goods sold. Savings in operating expenses are expected to result from the reduction of headcount through a shared services organization. Savings in cost of goods sold are expected to result from the elimination of manufacturing roles at miraDry. As the development of the Plan is completed, we will update the estimated costs and cost savings as needed.
Components of Operating Results
Net Sales
Our Breast Products segment net sales include sales of silicone gel breast implants, tissue expanders and BIOCORNEUM. We recognize revenue on breast implants and tissue expanders, net of sales discounts and estimated returns, as the customer has a standard six-month window to return purchased breast implants and tissue expanders. We defer the value of our service warranty revenue and recognize it once all performance obligations have been met.
Our miraDry segment net sales include sales of the miraDry System and consumable bioTips along with service warranties and deliverables under certain marketing programs.warranties. We recognize revenue on miraDry Systems and bioTips on delivery to the customer. See the “Recent Developments – Sale of the miraDry Business” section above. We defer the value of our service warranty and deliverables under certain marketing programs and recognize it over the term of the service warranty contract for service warranties and once all performance obligations have been met for deliverables under certain marketing programs.contract.
We expect that, in the future, our net sales will fluctuate on a quarterly basis due to a variety of factors, including seasonality of breast augmentation procedures and the impact of the pandemic, and purchase of miraDry procedures.pandemic. We believe that aesthetic procedures are subject to seasonal fluctuation due to patients planning their procedures leading up to the summer season and in the period around the winter holiday season.
Cost of Goods Sold and Gross Margin
Cost of goods sold consists primarily of raw material, labor, overhead, and variable manufacturing costs, reserve for product assurance warranties, royalty costs, excess and obsolete inventory reserves, and warehouse and other related costs.
With respect to our supplier contracts, all our products and raw materials are manufactured under contracts with fixed unit costs which can increase over time at specified amounts.
Under our Breast Products segment, we provide an assurance and service warranty on our silicone gel breast implants. Under our miraDry segment, we provide an assurance and service warranty on our miraDry Systems, and an assurance warranty on our handpieces and bioTips. See the “Recent Developments – Sale of the miraDry Business” section above. The estimated warranty costs are recorded at the time of sale. Costs related to our service warranty are recorded when expense is incurred related to meeting our performance obligations. In addition, the inventory fair market value associated with purchase accounting adjustments and royalty costs related to the SSP and miraDry acquisitions are recorded at the time of sale.
We expect our overall gross margin, which is calculated as net sales less cost of goods sold for a given period divided by net sales, to fluctuate in future periods primarily as a result of quantity of units sold, manufacturing price increases, the changing mix of products sold with different gross margins, warranty costs, overhead costs and targeted pricing programs.
Sales and Marketing Expenses
Our sales and marketing expenses primarily consist of salaries, bonuses, benefits, incentive compensation, stock-based compensation, digitalconsumer marketing, and travel for our sales, marketing and customer support personnel. Our sales and marketing expenses also include expenses for trade shows, our no‑charge customer shipping program for the Breast Products segment and no-charge product evaluation units for the Breast Products segment, as well as educational and promotional and marketing activities, including direct and online marketing.activities. We expect our sales and marketing expenses related to our Breast Products segment to fluctuate in future periods as a result of headcount and timing of our marketing programs. We expect our
sales and marketing expense related to our miraDry segment to decrease as we have implemented the organizational efficiency initiative and as a result of the Sale of the miraDry Business.
Research and Development Expenses
Our research and development, or R&D, expenses primarily consist of clinical expenses, product development costs, regulatory expenses, consulting services, outside research activities, quality control and other costs associated with the development of our products and compliance with Good Clinical Practices, or cGCP, requirements. R&D expenses also include related personnel and consultant compensation and stock‑based compensation expense. We expense R&D costs as they are incurred. We expect our R&D expenses to vary as different development projects are initiated, including improvements to our existing products, expansions of our existing product lines, new product acquisitions and our clinical studies.
General and Administrative Expenses
Our general and administrative, or G&A, expenses primarily consist of salaries, bonuses, benefits, incentive compensation and stock-based compensation for our executive, financial, legal, business development and administrative functions. Other G&A expenses include contingent consideration fair market value adjustments, bad debt expense, outside legal counsel and litigation expenses, independent auditors and other outside consultants, corporate insurance, facilities and information technologies expenses.
We expect future G&A expenses to decrease as we implementhave implemented the organizational efficiency initiative and the Sale of the miraDry Business, but we also expect to continue to incur G&A expenses in connection with operating as a public company.
Other income (expense), net primarily consists of interest income, interest expense, changes in the fair value of the embedded derivative liability and common stock warrants, and amortization of issuance costs associated with our Credit Agreements.
Income Taxes
Income tax expense consists of an estimate for income taxes based on the projected income tax expense for the period. We operate in several tax jurisdictions and are subject to taxes in each jurisdiction in which we conduct business. To date, we have incurred cumulative net losses and maintain a full valuation allowance on our net deferred tax assets due to the uncertainty surrounding realization of such assets.
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of our unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the revenues and expenses incurred during the reported periods. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We discussed accounting policies and assumptions that involve a higher degree of judgment and complexity in Note 21 of the “Notes to Financial Statements” in our audited financial statements included in the Annual Report. There have been no material changes to our critical accounting policies and estimates from those disclosed in the Annual Report.
Recent Accounting Pronouncements
Please refer to Note 21 - Summary of Significant Accounting Policies in the notes to the unaudited condensed consolidated financial statements included in this Form 10-Q for information on recent accounting pronouncements and the expected impact on our unaudited condensed consolidated financial statements.
Comparison of the Three Months Ended March 31, 20202021 and 20192020
The following table sets forth our results of operations for the three months ended March 31, 20202021 and 2019:2020:
|
| Three Months Ended |
|
| Three Months Ended |
| ||||||||||
|
| March 31, |
|
| March 31, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
| ||||
|
| (In thousands) |
|
| (In thousands) |
| ||||||||||
Statement of operations data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 16,932 |
|
| $ | 17,552 |
|
| $ | 23,236 |
|
| $ | 16,932 |
|
Cost of goods sold |
|
| 6,792 |
|
|
| 6,474 |
|
|
| 10,935 |
|
|
| 6,792 |
|
Gross profit |
|
| 10,140 |
|
|
| 11,078 |
|
|
| 12,301 |
|
|
| 10,140 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
| 16,763 |
|
|
| 20,401 |
|
|
| 12,375 |
|
|
| 16,763 |
|
Research and development |
|
| 2,908 |
|
|
| 3,054 |
|
|
| 2,392 |
|
|
| 2,908 |
|
General and administrative |
|
| 9,304 |
|
|
| 13,474 |
|
|
| 7,354 |
|
|
| 9,304 |
|
Restructuring |
|
| 1,739 |
|
|
| — |
|
|
| — |
|
|
| 1,739 |
|
Impairment |
|
| 6,432 |
|
|
| — |
|
|
| — |
|
|
| 6,432 |
|
Total operating expenses |
|
| 37,146 |
|
|
| 36,929 |
|
|
| 22,121 |
|
|
| 37,146 |
|
Loss from operations |
|
| (27,006 | ) |
|
| (25,851 | ) |
|
| (9,820 | ) |
|
| (27,006 | ) |
Other income (expense), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
| 180 |
|
|
| 304 |
|
|
| 2 |
|
|
| 180 |
|
Interest expense |
|
| (1,623 | ) |
|
| (952 | ) |
|
| (2,004 | ) |
|
| (1,623 | ) |
Change in fair value of derivative liability |
|
| (42,740 | ) |
|
| (130 | ) | ||||||||
Other income (expense), net |
|
| (163 | ) |
|
| 15 |
|
|
| (128 | ) |
|
| (33 | ) |
Total other income (expense), net |
|
| (1,606 | ) |
|
| (633 | ) |
|
| (44,870 | ) |
|
| (1,606 | ) |
Loss before income taxes |
|
| (28,612 | ) |
|
| (26,484 | ) |
|
| (54,690 | ) |
|
| (28,612 | ) |
Income tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net loss |
| $ | (28,612 | ) |
| $ | (26,484 | ) |
| $ | (54,690 | ) |
| $ | (28,612 | ) |
Net Sales
Net sales decreased $0.6increased $6.3 million, or 3.5%37.2%, to $23.2 million for the three months ended March 31, 2021 as compared to $16.9 million for the three months ended March 31, 2020 as compared to $17.62020. Net sales of our Breast Products segment was $18.3 million, an increase of $5.8 million for the three months ended March 31, 2019. Net sales of our Breast Products segment was2021, as compared to $12.5 million, an increase of $2.7 million for the three months ended March 31, 2020, primarily due to an increase in the volume of domestic and international sales of gel implants with additional smaller increases in BioCorneum and expanders. Net sales of our miraDry segment was $4.9 million, an increase of $0.5 million, as compared to $9.8$4.5 million for the three months ended March 31, 2019, driven primarily by2020 resulting from an increase in the sales volume of sales of silicone gel breast implants and Allox2 and Dermaspan breast tissue expanders. Net sales of our miraDry segment was $4.5 million,consumable bioTips offset by a decrease of $3.3 million, as compared to $7.8 million for the three months ended March 31, 2019, resulting from an overall decrease in the sales volume of sales of miraDry systems and consumable bioTips due to the effects ofchange in the COVID-19 pandemic.miraDry business strategy.
As of March 31, 2020,2021, our U.S. sales organization included 78 sales representatives66 U.S. employees and 2 international employees, as compared to 89 sales representativesU.S. employees and 8 international employees as of March 31, 2019.2020. The decrease is primarily attributed to an overall decrease in sales headcount implemented under the organizational efficiency initiative.initiative and the change in miraDry business strategy.
Cost of Goods Sold and Gross Margin
Cost of goods sold increased $0.3$4.1 million, or 4.9%61.0%, to $10.9 million for the three months ended March 31, 2021 as compared to $6.8 million for the three months ended March 31, 2020 as compared to $6.5 million for the three months ended March 31, 2019.2020. The increase was primarily due to an increase in the sales volume of all products in the Breast Products reporting unit offset by reduced cost of goods sold from reduced salessegment, in addition to higher period costs in the miraDry unit.segment as a result of a decline in manufacturing absorption relating to the change in business strategy.
The gross margins for the three months ended March 31, 2021 and 2020 were 52.9% and 2019 were 59.9% and 63.1%, respectively. The decrease was primarily due to increased unithigher period costs in the miraDry segment as a result of Breast Products inventory coupled with lower sales of miraDry consumables which carry a higher margin.decline in manufacturing absorption relating to the change in business strategy.
Sales and Marketing Expenses
Sales and marketing expenses decreased $3.6$4.4 million, or 17.8%26.2%, to $12.4 million for the three months ended March 31, 2021 as compared to $16.8 million for the three months ended March 31, 2020 as compared to $20.4 million for the three months ended March 31, 2019.2020. The decrease was primarily due to lower employee-related costsreductions in marketing events and initiatives, a reduction in consulting fees, and decreases in employee payroll and incentive compensation related expenses as a result of decreased sales headcount,the organizational efficiency initiative, the change in the miraDry business strategy and a decreaseother cost saving measures implemented in marketing events and initiatives.response to COVID-19.
Research and Development Expenses
R&D expenses decreased $0.1$0.5 million, or 4.8%17.7%, to $2.4 million for the three months ended March 31, 2021 as compared to $2.9 million for the three months ended March 31, 2020 as compared to $3.1 million for the three months ended March 31, 2019.2020. The decrease was primarily due to decreases in employee payroll and incentive compensation related expenses as a decreaseresult of the organizational efficiency initiative, the change in employee-related coststhe miraDry business strategy and consulting fees.other cost saving measures implemented in response to COVID-19.
General and Administrative Expenses
G&A expenses decreased $4.2$2.0 million, or 30.9%21.0%, to $7.4 million for the three months ended March 31, 2021 as compared to $9.3 million for the three months ended March 31, 2020 as compared2020. The decrease is primarily related to $13.5 milliondecreases in audit and consulting expenses, bad debt expense, and intangibles amortization expense, offset by increases in expenses related to employee payroll and incentive compensation, legal, and insurance.
Restructuring Expenses
There were no restructuring expenses for the three months ended March 31, 2019. The decrease is primarily related to a decrease in consulting expenses, employee payroll related expenses, legal expenses and contingent consideration fair value adjustments, offset by an increase in accounting fees.
Restructuring Expenses
2021, as the organizational efficiency initiative was completed as of December 31, 2020. Restructuring expenses for the three months ended March 31, 2020 were $1.7 million, consistingconsisted primarily of severance expenses of employees affected by the organizational efficiency initiative.
Impairment Expenses
IntangibleThere were no impairment expenses were $6.4 million for the three months ended March 31, 2021. Impairment expenses for the three months ended March 31, 2020 due toconsisted of impairments of intangible assets in the miraDry reporting unit.
Other Income (Expense), net
Other income (expense), net for the three months ended March 31, 2021 increased $43.3 million as compared to the three months ended March 31, 2020 primarily due to the increase in the fair value of the derivative liability resulting from an increase in the Company’s stock price during the period, and 2019 was primarily associated with expenses related toan increase in interest expense and amortization of debt issuance costs and debt discounts associated with our Credit Agreements the change in fair value of warrants and interest income on cash held in a money market account.convertible note.
Income Tax Expense
For the three months ended March 31, 20202021 and 20192020 there was no income tax expense.
Liquidity and Capital Resources
Since our inception, we have incurred significant net operating losses and anticipate that our losses will continue in the near term. We expect our operating expenses will continue to grow asdecrease following the completion of the organizational efficiency initiative in 2020 and the sale of the miraDry business, but we expand our operations. We will need to generate
significant net sales to achieve profitability. To date, we have funded our operations primarily with proceeds from the sales of preferred stock, borrowings under our term loans and convertible note, sales of our products since 2012, and the proceeds from the sale of our common stock in public offerings.
Debt financing – recent developments
On July 25, 2017,February 5, 2021, we entered into a Second Amended and Restated Credit and Security Agreement (Term Loan), by and among the ExistingCompany, certain of our subsidiaries (together with Sientra, the “Borrowers”), the lenders party thereto from time to time and MidCap Financial Trust, as administrative agent and collateral agent (“Agent”) (the “Restated Term Loan Agreement”). The Restated Term Loan Agreement amends and restates our existing Amended and Restated Credit Agreements with Midcap. Onand Security Agreement (Term Loan), dated as of July 1, 2019,2019.
Also on February 5, 2021, we entered into certain credit agreements with Midcap Financial Trust pursuanta Third Amendment to which we repaid our existing indebtedness under our ExistingAmended and Restated Credit Agreementsand Security Agreement (Revolving Loan), by and among the Borrowers, the lenders party thereto from time to time, and the outstanding commitment fee was cancelled. On March 11, 2020, we issuedAgent (the “Revolving Loan Amendment”). The Revolving Loan Amendment modified the Convertible NoteNet Revenue (as defined therein) requirement in a manner consistent with the modification under the Restated Term Loan Agreement. In addition, the Revolving Loan Amendment made other conforming changes to Deerfield Partners, L.P. the Restated Term Loan Agreement.
See Note 11 – Debt6 to the condensed consolidated financial statements for a full description of all of our long-term debt, revolving line of credit, convertible note, and convertible note.PPP loan.
In February 2018, we entered into an At-The-Market Equity Offering Sales Agreement with Stifel, Nicolaus & Company, Incorporated, or Stifel, as sales agent pursuant to which we may sell, from time to time, through Stifel shares of our common stock having an aggregate gross offering price of up to $50 million. As of March 31, 2020, the Company has sold 37,000 shares of its common stock pursuant to the sales agreement, resulting in net proceeds after commissions of approximately $0.3 million.financing – recent developments
On May 7, 2018,February 8, 2021, we completed an underwrittena follow-on public offering in which we sold 7,407,408of 5,410,628 shares of common stock at $13.50$6.75 per share, as well as 1,111,111 additional shares of common stock pursuant to the full exercise of the over-allotment option granted to the underwriters. Net proceeds to the Company were approximately $107.6 million after deducting underwriting discounts and commissions of $6.9 million and offering expenses of approximately $0.5 million.
Further, on June 7, 2019, we completed an underwritten follow-on public offering of 17,391,305 shares of common stock at $5.75 per share, as well as 2,608,695811,594 additional shares of common stock pursuant to the full exercise of the over-allotment option granted to the underwriters. Net proceeds were approximately $107.7$39.2 million after deducting underwriting discounts and commissions of $6.9approximately $2.5 million and offering expenses of approximately $0.4$0.3 million.
As of March 31, 2020,2021, we had $112.1$80.4 million in cash and cash equivalents. Our historical cash outflows have primarily been associated with research and development activities and activities relating to commercialization and increases in working capital, including the expansion of our sales force and marketing programs.capital. In addition, we have used cash to fund the acquisitions of miraDry, BIOCORNEUM, Vesta, and ourthe tissue expander portfolio.
Due to the continued uncertainty relating to the COVID-19 pandemic, our revenues may continue to be adversely impacted. If we are unable to achieve certain revenue targets, we may breach certain financial covenants set forth in our Credit Agreement with MidCap Financial Trust. If we breach these covenants, MidCap will have the right to accelerate repayment of the outstanding amounts. In addition, a breach of a financial covenant in the Credit Agreement would result in a cross default under our Note with Deerfield, which would allow Deerfield to accelerate repayment of the amounts owed, subject to certain restrictions. In the event that any of MidCap or Deerfield accelerates the repayment of our indebtedness, there can be no assurance that we will have sufficient cash on hand to satisfy such obligations and our business operations may be materially harmed.
To fund our ongoing operating and capital needs, we may need to raise additional equity or debt capital. We believe we have sufficient capital resources to continue as a going concern through the next twelve months.
Cash Flows
The following table shows a summary of our cash flows (used in) provided by operating, investing and financing activities for the periods indicated:
|
| Three Months Ended March 31, |
|
| Three Months Ended March 31, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
| ||||
Net cash (used in) provided by: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
| $ | (27,189 | ) |
| $ | (24,646 | ) |
| $ | (12,667 | ) |
| $ | (27,189 | ) |
Investing activities |
|
| (1,206 | ) |
|
| (610 | ) |
|
| (1,321 | ) |
|
| (1,206 | ) |
Financing activities |
|
| 52,849 |
|
|
| 312 |
|
|
| 39,393 |
|
|
| 52,849 |
|
Net change in cash, cash equivalents and restricted cash |
| $ | 24,454 |
|
| $ | (24,944 | ) |
| $ | 25,405 |
|
| $ | 24,454 |
|
Cash used in operating activities
Net cash used in operating activities was $12.7 million during the three months ended March 31, 2021 as compared to $27.2 million during the three months ended March 31, 2020 as compared to $24.6 million during the three months ended March 31, 2019.2020. The increasedecrease in cash used in operating activities between the three months ended March 31, 20202021 and 20192020 was primarily associated with a higher net loss of $28.6 million for the three months ended March 31, 2020 as compareddecrease in operating expenses in addition to $26.5 million for the three months ended March 31, 2019, ana smaller increase in inventory, increases in prepaid expenses, other current assets, and other assets, decreases in accounts payable, accrueds, and other liabilities, offset by a decrease in accounts receivable due to the timing of sales and collections.working capital.
Cash used in investing activities
Net cash used in investing activities was $1.2$1.3 million during the three months ended March 31, 2020 as compared to $0.6 million during the three months ended March 31, 2019.2021 and 2020. The slight increase in cash used in investing activities between the three months ended March 31, 2020 and 2019 was due to an increase in property and equipment purchases.
Cash provided by financing activities
Net cash provided by financing activities was $39.4 million during the three months ended March 31, 2021 as compared to $52.8 million during the three months ended March 31, 2020 as compared to $0.3 million during the three months ended March 31, 2019.2020. The increasedecrease in cash provided by financing activities was primarily the result of an increase in proceeds fromthe issuance of the convertible note in the prior period which did not reoccur in the current period, offset by an increaseincreases in the repaymentproceeds from the issuance of common stock from the revolving loan.follow-on offering in the current period.
Our liquidity position and capital requirements are subject to a number of factors. For example, our cash inflow and outflow may be impacted by the following:
the ability of our implant manufacturing facility in Franklin Wisconsin to meet capacity to meet customer requirements;
• | the ability of our implant manufacturing facility in Franklin, Wisconsin to meet capacity to meet customer requirements and maintain unit costs that will drive gross margin; |
the ability of our third-party tissue expander manufacturing facility operated by SiMatrix to meet capacity to meet customer requirements;
• | the ability of our third-party tissue expander manufacturing facility operated by SiMatrix to meet capacity to meet customer requirements; |
net sales generated by our Breast Products and miraDry segments, and any other future products that we may develop and commercialize;
• | net sales generated by our Breast Products and miraDry segments, and any other future products that we may develop and commercialize; |
the scope and duration of the COVID-19 pandemic and its effect on our operations;
• | the scope and duration of the COVID-19 pandemic and its effect on our operations; |
costs associated with expanding our sales force and marketing programs;
• | costs associated with expanding our sales force and marketing programs; |
cost associated with developing and commercializing our proposed products or technologies;
• | cost associated with developing and commercializing our proposed products or technologies; |
expenses we incur in connection with potential litigation or governmental investigations;
• | expenses we incur in connection with potential litigation or governmental investigations; |
cost of obtaining and maintaining regulatory clearance or approval for our current or future products;
• | cost of obtaining and maintaining regulatory clearance or approval for our current or future products; |
cost of ongoing compliance with regulatory requirements, including compliance with Sarbanes-Oxley;
• | cost of ongoing compliance with regulatory requirements, including compliance with Sarbanes-Oxley; |
anticipated or unanticipated capital expenditures; and
• | anticipated or unanticipated capital expenditures; and |
unanticipated G&A expenses.
• | unanticipated G&A expenses. |
Our primary short-term capital needs, which are subject to change, include expenditures related to:
support of our sales and marketing efforts related to our current and future products;
• | support of our sales and marketing efforts related to our current and future products; |
new product acquisition and development efforts;
• | new product acquisition and development efforts; |
facilities expansion needs; and
• | facilities expansion needs; and |
investment in inventory required to meet customer demands.
• | investment in inventory required to meet customer demands. |
Although we believe the foregoing items reflect our most likely uses of cash in the short-term, we cannot predict with certainty all of our particular short-term cash uses or the timing or amount of cash used. If cash generated from operations is insufficient to satisfy our working capital and capital expenditure requirements, we may be required to sell additional equity or debt securities or obtain credit facilities. Additional capital, if needed, may not be available on satisfactory terms, if at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants. For a discussion of other factors that may impact our future liquidity and capital funding requirements, see “Risk Factors — Risks Related to Our Financial Results” in our Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
During the periods presented we did not have, nor do we currently have, any off-balance sheet arrangements as defined under SEC rules.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2020,2021, we had $112.1$80.4 million in cash and cash equivalents. We generally hold our cash in checking accounts and interest-bearing money market accounts. Our exposure to market risk related to interest rate sensitivity is affected by changes in the general level of U.S. interest rates. Due to the short-term maturities of our cash equivalents and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our cash equivalents. We have established guidelines regarding approved investments and maturities of investments, which are designed to maintain safety and liquidity.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, as appropriate, to allow timely decisions regarding required disclosure.
As of March 31, 20202021, we carried out an evaluation, under the supervision and with the participation of our management, including our CEO and interim CFO, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, the CEO and interim CFO concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2020 as a result of the material weakness described in our Annual Report on Form 10-K and below.
The control environment was ineffective in holding individuals accountable for the operation of their internal control responsibilities. This control failure prevented the effective operation of controls over goodwill and intangible asset impairment, including the underlying financial data, calculations and assumptions supporting the forecasted financial information utilized to measure the fair value of the reporting unit, intangible assets, and the associated
impairment charges. This deficiency did not result in an adjustment but still represented a material weakness in our internal control over financial reporting as of December 31, 2019 because there is a reasonable possibility that material misstatements to our consolidated financial statements would not be prevented or detected on a timely basis.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
Remediation
As disclosed in our Annual Report, we have identified and begun to implement several actions designed to remediate the material weakness. Our remediation process includes, but is not limited to communicating expectations over performance of controls, monitoring for compliance with those expectations, and holding individuals accountable for their roles related to internal control over financial reporting.date.
Changes in Internal Control over Financial Reporting
Except as discussed above, thereThere have been no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
From time to time, we are involved in legal proceedings and regulatory proceedings arising out of our operations. We establish reserves for specific liabilities in connection with legal actions that we deem to be probable and estimable. The ability to predict the ultimate outcome of such matters involves judgments, estimates, and inherent uncertainties. The actual outcome of such matters could differ materially from management’s estimates. Information regarding certain legal proceedings is provided in this Quarterly Report in Note 1511 of the condensed consolidated financial statements.
Except as set forth below, there have been no material changes from the risk factors disclosed in Part I, Item 1A, of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019,2020, which are incorporated herein by reference.
The COVID-19 pandemic has adversely affected, and continuesFailure to adversely affect,complete the sale of our business, our operations and our financial results. Future pandemics, epidemics or outbreaks of an infectious disease may similarly affect our business, our operations and our financial results.
The recent outbreak of COVID-19 originated in Wuhan, China, in December 2019 and has since spread to multiple countries, including the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has drastically impacted healthcare systems in the United States and globally and resulted in travel restrictions which impact medical tourism and our sales professionals’ ability to travel. In addition, hospitals have limited access for non-patients, including our sales professionals, whichmiraDry Business could negatively impact our access to physicians. As an aesthetics company, a significant percentage of our products are utilized in elective surgeries or procedures, which may be deferred or avoided altogether due to the COVID-19 outbreak, materially impacting our financial results. Future pandemics or other outbreaks of infectious disease may result in a similar period of business disruption, including reduced sales as patients might cancel or defer elective procedures or otherwise avoid medical facilities, resulting in reduced patient volumes and operating revenues. Governmental agencies and hospital administrators may also instruct hospitals to postpone some elective procedures in preparation for COVID-19-related hospitalizations. The continued spread of COVID-19, or another infectious disease, could
also result in delays or disruptions in our supply chain or adversely affect our manufacturing facilities and personnel. The COVID-19 outbreak has materially impacted our operations and financial results and continues to be fluid and uncertain, making it difficult to forecast the final impact it could have on our future operations or financial results.
Our debt obligations could impair our financial condition and limit our operating flexibility.
Our indebtedness under our credit agreements with MidCap Financial Trust, or the Credit Agreements, our Convertible Note with Deerfield and our other financial obligations could:
impair our ability to obtain financing or additional debt in the future for working capital, capital expenditures, acquisitions or general corporate purposes;
impair our ability to access capital and credit markets on terms that are favorable to us;
have a material adverse effect on us if we fail to comply with financial and affirmative and restrictive covenants in our Credit Agreements and an event of default occurs as a result of a failure that is not cured or waived;
require us to dedicate a portion of our cash flow for interest payments on our indebtedness and other financial obligations, thereby reducing the availability of our cash flow to fund working capital and capital expenditures; and
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.
Our financial covenants in the Credit Agreements require us to achieve certain levels of net revenue calculated on a rolling monthly basis. Due to the continued uncertainty relating to the COVID-19 pandemic, our revenues may continue to be adversely impacted. If we are unable to achieve certain revenue targets, we may breach certain financial covenants set forth in our Credit Agreements. If we breach these covenants, MidCap will have the right to accelerate repayment of the outstanding amounts. In addition, a breach of a financial covenant in the Credit Agreement would result in a cross default under our Convertible Note with Deerfield, which would allow Deerfield to accelerate repayment of the amounts owed, subject to certain restrictions. In the event that any of MidCap or Deerfield accelerates the repayment of our indebtedness, there can be no assurance that we will have sufficient cash on hand to satisfy such obligations and our business, operations may be materially harmed.prospects, financial condition, cash flow or results of operations.
Furthermore, there is no guarantee thatOn May 11, 2021, we entered into an Asset Purchase Agreement pursuant to which we will be able to pay the principal and interest under the Credit Agreements or the Convertible Note or that future working capital, borrowings or equity financing will be available to repay or refinance any amounts outstanding under the Credit Agreements or Convertible Note. Our obligations under the Credit Agreements are secured by a perfected security interest insell substantially all of our tangible and intangiblethe assets (including our intellectual property assets), except for certain customary excluded property and allof the miraDry business, or “sale of the miraDry Business”. Such sale is subject to numerous closing conditions, some of which are out of our control, and our subsidiaries capital stock, with certain limited exceptions. In addition, we may enter into debt agreements in the future that may contain similar or more burdensome terms and covenants, including financial covenants.
We may not successfully integrate newly acquired businesses into our business operations or realize the benefits of partnerships with other companies, acquisitions of complementary products or technologies or other strategic alternatives.
We have completed a series of business and product acquisitions including our acquisition of our manufacturing operations from Vesta, our acquisition of miraDry, our product acquisitions, including BIOCORNEUM and our tissue expanders portfolio. As a result of these acquisitions, we have undergone substantial changes to our business and product offerings in a short period of time. In addition, in the future, we may consider other opportunities to partner with or acquire other businesses, products or technologies that may enhance our product platform or technology, expand the breadth of our markets or customer base or advance our business strategies.
Integrating the business practice and operations of a new business with that of our own is a complex, costly and time-consuming process, which requires significant management attention and resources. The integration process may disrupt our existing operations and, if implemented ineffectively, would preclude realization of the full benefits expected by us. Our failure to meet the challenges involved in successfully integrating our acquisitions in order to realize the anticipated benefits may cause an interruption of, or a loss of momentum in, our operating activities and could adversely affect our results of operations. For example, we recently determined to refocus our miraDry reporting unit to driving sales of consumable bioTips to our existing installed base. Therethere can be no assurances that we will achieve significant salesthe sale of the miraDry system under this refocused plan or, if we do, that weBusiness will be able to do so in a profitable manner. Potential difficulties, costs and delays we may encounter as part of the integration process may include:
distracting management from day‑to‑day operations;
potential incompatibility of corporate cultures;
an inability to achieve synergies as planned;
risks associated with the assumption of contingent or other liabilities of acquisition targets;
adverse effects on existing business relationships with suppliers or customers;
inheriting and uncovering previously unknown issues, problems and costs from the acquired company;
uncertainties associated with entering new markets in which we have limited or no experience;
increased legal and accounting costs relating to the partnership or acquisition or compliance with regulatory matters;
delays between our expenditures to acquire new products, technologies or businesses and the generation of net sales from those acquired products, technologies or businesses;
realization of assets and settlement of liabilities at amounts equal to estimated fair value as of the acquisition date of any acquisition or disposition;
costs and delays in implementing common systems and procedures (including technology, compliance programs, financial systems, distribution and general business operations, among others); and
increased difficulties in managing our business due to the addition of international locations.
Any one or all of these factors may increase operating costs or lower anticipated financial performance. Many of these factors are also outside of our control. In addition, even if new business operations are integrated successfully, we may not realize the full benefits of the acquisition, including the synergies, cost savings or sales or growth opportunities that we expect or within the anticipated time frame. Additional unanticipated costs may be incurredcompleted in the integration of the businesses. All of these factors could decreaseexpected timeline or delay the expected accretive effect of the transaction, and negatively impact theat all. The price of our common stock. The failurestock may decline to integrate the business operationsextent that its current market price reflects a market assumption that the sale of the miraDry Business will be completed. In addition, substantial resources have been diverted and will continue to be diverted toward the completion of the sale of the miraDry Business, for which we will have received little or any acquired business successfully wouldno benefit if the sale of the miraDry Business does not close. We have a material adverse effect onincurred, and expect to incur, significant costs, expenses and fees for professional services and other transaction and transition costs in connection with the sale of the miraDry Business. We must pay these costs whether or not the sale is completed, and they could adversely affect our business, financial condition and results of operations. As noted above,Furthermore, we determined to refocus efforts on driving sales of bioTips to our existing installed base. There can be no assurance that this shift in focus will allow us to realize the expected benefits from this acquisition.
If we are unable to drive sales of our bioTips to our existing installed base of miraDry systems, our business and future prospects will be harmed.
In April 2020, we determined to focus on driving high margin, bioTip utilization to our existing installed base combined with a controlled placement of consoles. We expect that the net sales we generatemay experience negative reactions from our bioTips will represent high margin sales (on a gross margin basis)stockholders, partners, employees, suppliers, dealers and account for a substantial amount of our net sales forothers who deal with us, and the next several years, with high margin consumables comprising a sizable percentage of our miraDry segment’s net sales. Accordingly, our success depends onfailure to consummate the acceptance among physicians and patientssale of the miraDry procedure asBusiness could result in negative publicity and a preferred treatment for being sweat-bothered. Although we have received FDA clearance to market the miraDry procedure for the treatmentnegative impression of primary axillary hyperhidrosis, odor and permanent hair reductionus in the United States and are approved or are otherwise free to market the miraDry procedure for the treatmentinvestment community, any of primary ancillary hyperhidrosis in adults in over 40 international markets, the degree of market acceptance of the miraDry procedure by physicians and patients is unproven. We believe that market acceptance of the miraDry procedure will depend on many factors, including:
the perceived advantages or disadvantages of the miraDry System compared to other products and procedures;
the safety and efficacy of the miraDry System relative to other products and alternative procedures;
the price of the miraDry System relative to other products and alternative procedures;
our success in expanding our sales and marketing organization;
the effectiveness of our marketing, advertising, and commercialization initiatives;
the development and publication of long-term clinical data in peer-reviewed journals supporting the long term efficacy of the miraDry procedure;
our ability to obtain regulatory clearance to market miraDry for additional treatment indications in the United States and other international markets;
education of physicians, especially general practitioners and dermatologists, regarding alternative procedures for sweat-bothered patients through key opinion leaders and product demonstrations at conferences, physician offices and webinars; and
the success of patient education through direct-to-consumer marketing campaigns that utilize social media outlets and testimonials.
In addition, the COVID-19 pandemic has limited our ability to educate physicians and drive market acceptance of the procedure. We cannot guarantee that the miraDry procedure will achieve broad market acceptance among physicians and patients. We expect to derive a substantial portion of sales from the sale of our consumable bioTip products, which represent higher margin products within our product portfolio. As a result, any failure of this product to achieve meaningful market acceptance will harm our business, sales, profitability and future prospects.
If changes in the economy and consumer spending reduce consumer demand for our products, our sales and profitability would suffer.
We are subject to the risks arising from adverse changes in general economic and market conditions, pandemics or political actions including new or increased trade protection policies such as tariffs, particularly in China, where certain components of our miraDry products are manufactured. Certain elective procedures, such as breast augmentation and the miraDry procedure, are typically not covered by insurance. Adverse changes in the economy or a “trade war” may cause consumers to reassess their spending choices and reduce the demand for these surgeries and other procedures and could have an adverse effect on consumer spending. This shift could have an adverse effect on our net sales and profitability. Furthermore, consumer preferences and trends may shift due to a variety of
factors, including changes in demographic and social trends, public health initiatives and product innovations, which may reduce consumer demand for our products. For example, in December 2019, there was an outbreak of a novel strain of coronavirus (COVID-19) in Wuhan, China that has since spread to other regions in China and the rest of the world. To contain the outbreak, the Chinese central government extended the Lunar New Year holiday for one week and issued guidance pursuant to which local governments in China have taken temporary measures to limit large gatherings and impose travel restrictions. As a result, our bioTip manufacturer in China was required to close for a week and has only recently reopened and is operating at reduced capacity as of the date of this Quarterly Report on Form 10-Q. In addition, as the outbreak spread through the United States and globally, we have experienced a significant reduction in demand as non-emergency medical procedures are deferred. There can be no assurances that once healthcare systems resume normal activity that these deferred procedures will be rescheduled. The outbreak has adversely affected ourbusiness, prospects, financial condition, cash flow and results of operations and will likely continue to adversely impact our operations until heathcare systems resume normal activity. At this point, the duration and extent of such impact is uncertain.operations.
If we are unsuccessful in executing our cost plan, our business and results of operations may be adversely affected.
In November 2019, we announced an organizational efficiency initiative (the “Plan”) designed to reduce spending and simplify operations to better align our cost structure to our long-term margin targets. Under the Plan, we will implement numerous initiatives to reduce spending, including closing the Santa Clara offices of miraDry, Inc. (“miraDry”), and consolidating a number of business support services via a shared services organization at our Santa Barbara headquarters. Under the Plan, we also intend to reduce our workforce in a series of targeted reductions, which we expect to be completed by the end of 2020. We cannot provide assurance that our Plan will be successful, that anticipated cost savings will be realized, that our operations, business and financial results will improve and/or that these efforts will not disrupt our operations (beyond what is intended).
In April 2020, we implemented additional workforce reductions as cost savings measures. Our ability to achieve the anticipated cost savings and other benefits within the expected time frames is subject to many estimates and assumptions, which are subject to significant economic, competitive and other uncertainties, some of which are beyond our control. Further, we may experience delays in the timing of these efforts and/or higher than expected or unanticipated costs in implementing them. Moreover, changes in the size, alignment or organization of our workforce could adversely affect employee morale and retention, relations with customers and business partners, our ability to develop and deliver products and services as anticipated and/or impair our ability to realize our current or future business and financial objectives. If we do not succeed in these efforts, if these efforts are more costly or time-consuming than expected, if our estimates and assumptions are not correct, if we experience delays or if other unforeseen events occur, our business and results of operations may be adversely affected.
Any disruption at our facilities could adversely affect our business and operating results.
Our principal offices are located in Santa Barbara, California. Substantially all of our operations are conducted at this location, including customer service, development and management and administrative functions. Substantially all of our inventory of Breast Products is held at a second location in Santa Barbara, California, and, with the Vesta Acquisition, we manufacture our breast implants at a third location in Wisconsin. Despite our efforts to safeguard our facilities, including acquiring insurance, adopting health and safety protocols and utilizing off-site storage of computer data, vandalism, terrorism, public health crisis (such as the recent COVID-19 outbreak) or a natural or other disaster, such as an earthquake, tornado, fire or flood, could damage or destroy our inventory of finished goods, cause substantial delays in our operations, result in the loss of key information and cause us to incur additional expenses. Our insurance may not cover our losses in any particular case. In addition, regardless of the level of insurance coverage, damage to our facilities may have a material adverse effect on our business, financial condition and operating results.
We accepted a loan under the CARES Act pursuant to the Paycheck Protection Program, or the PPP, which loan may not be forgiven or may subject us to challenges and investigations regarding qualification for the loan. In addition, we may be subject to audit in connection with the loan and should we request that the loan be forgiven, the United States Small Business Administration, or SBA, will conduct a full audit in connection with the loan. If there is any adverse finding from the audit or if we are subject to any other investigation or challenge in connection with the loan, we could be required to return the full amount of the PPP loan plus interest, which could reduce our liquidity, and could be subject to significant fines, damages and penalties and its business could otherwise be adversely affected, whether or not there is an adverse finding. Such events could have a material adverse effect on our business, financial condition and results of operations.
In April 2020, we were granted a loan of $6.7 million under the PPP of the CARES Act, or the PPP Loan, all or a portion of which may be forgiven dependent on our use of proceeds. The PPP Loan matures on April 27, 2022 and bears interest at a rate of 1.0% per annum. All or a portion of the PPP Loan may be forgiven by the SBA upon application by us beginning 60 days, but not later than 120 days, after loan approval and upon documentation of expenditures in accordance with the SBA’s requirements. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities during the eight week period beginning on the date of loan approval. Not more than 25% of the forgiven amount may be for non-payroll costs. The amount of the PPP Loan eligible to be forgiven will be reduced if our full-time headcount declines, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25%. We will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, in accordance with the amortization schedule described above, and we cannot provide any assurance that we will be eligible for loan forgiveness, that we will ultimately apply for forgiveness, or that any amount of the PPP Loan will ultimately be forgiven by the SBA. Furthermore, on April 28, 2020, the Secretary of the U.S. Department of the Treasury stated that the SBA will perform a full review of any PPP loan over $2.0 million before forgiving the loan.
The PPP Loan application required us to certify, among other things, that the current economic uncertainty made the PPP Loan request necessary to support our ongoing operations. While we made this certification in good faith after analyzing, among other things, our financial situation and access to alternative forms of capital, and believe that we satisfied all eligibility criteria for the PPP Loan and that our receipt of the PPP Loan is consistent with the broad objectives of the PPP of the CARES Act, the certification described above does not contain any objective criteria and is subject to interpretation. In addition, the SBA has stated that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. The lack of clarity regarding loan eligibility under the Paycheck Protection Program has resulted in significant media coverage and controversy with respect to public companies applying for and receiving loans. If, despite our good faith belief that we satisfied all eligibility requirements for the PPP Loan, we are found to have been ineligible to receive the PPP Loan or in violation of any of the laws or governmental regulations that apply to us in connection with the PPP Loan, including the False Claims Act, we may be subject to penalties, including significant civil, criminal and administrative penalties and could be required to repay the PPP Loan. In the event that we seek forgiveness of all or a portion of the PPP Loan, we will also be required to make certain certifications which will be subject to audit and review by governmental entities and could subject us to significant penalties and liabilities if found to be inaccurate, including under the False Claims Act. In addition, our receipt of the PPP Loan may result in adverse publicity and damage to our reputation, and a review or audit by the SBA or other government entity or claims under the False Claims Act could consume significant financial and management resources. Any of these events could harm our business, results of operations and financial condition.
ItemITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSPROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
On May 11, 2020, the Company entered in to the Second Amendment to Amended and Restated Credit and Security Agreement (Term Loan) (the “Term Agreement”), by and among the Company, certain of the Company’s subsidiaries, the lenders party thereto and MidCap Financial Trust as agent (the “Term Amendment”). The Term Amendment provides for, among other things, the prepayment by the Company of approximately $25.0 million of outstanding principal plus accrued interest, with the parties agreeing to waive the prepayment fee with respect to this amount. In connection with the prepayment, the Term Amendment requires the Company to prepay $1.25 million of the exit fee under the Term Agreement. The Term Amendment increases the tranche 3 commitment amount from $10.0 million to $15.0 million, extends the tranche 3 termination date from December 31, 2020 to June 30, 2021, and amends certain conditions upon which the tranche 3 commitment can be withdrawn, including evidence that the Company’s Net Revenue for the past six months was greater than or equal to $30.0 million. In addition, the Term Amendment amends certain financial requirements including reducing the Company’s minimum unrestricted cash amount from $20.0 million to $5.0 million and amends certain minimum net revenue requirements. Further, the monthly minimum net revenue requirements were revised to be calculated on a trailing three month basis. On May 11, 2020, the Company prepaid $25.0 million of principal, $1.25 million of the exit fee, and $0.1 million of accrued interest.
In addition, on May 11, 2020, the Company entered in to the Second Amendment to Amended and Restated Credit and Security Agreement (Revolving Loan), by and among the Company, certain of the Company’s subsidiaries, the lenders party thereto and MidCap Financial Trust as agent (the “Revolving Amendment”). The Revolving Amendment includes conforming changes to reflect the changes in the Term Amendment. In addition, the Revolving Amendment reduces the borrowing base by the portion of the eligible inventory previously included in the calculation.None.
The following exhibits are filed or furnished as part of this report:
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101.INS |
| Instance Document - the instance document does not appear in the interactive Data File because its XBRL |
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101.SCH |
| Inline XBRL Taxonomy Extension Schema Document. |
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101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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104 |
| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* | Filed herewith. |
+ | Management contract of compensatory plan. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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May 11, | By: | /s/ |
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May 11, | By: | /s/ |
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| Interim Chief Financial Officer and |
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